Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period from                      to                     

Commission file number 001-35095

 

 

UNITED COMMUNITY BANKS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Georgia   58-1807304
(State of Incorporation)  

(I.R.S. Employer

Identification No.)

 

125 Highway 515 East

Blairsville, Georgia

  30512
Address of Principal Executive Offices   (Zip Code)

(706) 781-2265

(Telephone Number)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES  x    NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).     YES  ¨    NO  x

Common stock, par value $1 per share 41,774,770 shares voting and 15,914,209 shares non-voting outstanding as of July 31, 2012.

 

 

 


Table of Contents

INDEX

 

PART I - Financial Information

  

Item 1. Financial Statements

  

Consolidated Statement of Operations (unaudited) for the Three and Six Months Ended  June 30, 2012 and 2011

     3   

Consolidated Statement of Comprehensive (Loss) Income (unaudited) for the Three and Six Months Ended June 30, 2012 and 2011

     4   

Consolidated Balance Sheet at June 30, 2012 (unaudited), December 31, 2011  (audited) and June 30, 2011 (unaudited)

     5   

Consolidated Statement of Changes in Shareholders’ Equity (unaudited) for the  Six Months Ended June 30, 2012 and 2011

     6   

Consolidated Statement of Cash Flows (unaudited) for the Six Months Ended June  30, 2012 and 2011

     7   

Notes to Consolidated Financial Statements

     8   

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

     29   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     52   

Item 4. Controls and Procedures

     52   

PART II - Other Information

  

Item 1. Legal Proceedings

     53   

Item 1A. Risk Factors

     53   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     53   

Item 3. Defaults Upon Senior Securities

     53   

Item 4. Mine Safety Disclosures

     53   

Item 5. Other Information

     53   

Item 6. Exhibits

     54   

 

2


Table of Contents

Part I – Financial Information

Item 1 – Financial Statements

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Operations (Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(in thousands, except per share data)

   2012     2011     2012     2011  

Interest revenue:

        

Loans, including fees

   $ 54,178      $ 60,958      $ 109,937      $ 122,065   

Investment securities, including tax exempt of $262, $251, $512 and $510

     11,062        14,792        24,066        28,396   

Federal funds sold, reverse repurchase agreements, commercial paper and deposits in banks

     1,096        752        2,108        1,571   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest revenue

     66,336        76,502        136,111        152,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Interest expense:

        

Deposits:

        

NOW

     503        1,036        1,140        2,360   

Money market

     661        1,499        1,302        3,527   

Savings

     38        64        75        141   

Time

     5,073        10,995        11,232        22,727   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total deposit interest expense

     6,275        13,594        13,749        28,755   

Federal funds purchased, repurchase agreements and other short-term borrowings

     904        1,074        1,949        2,116   

Federal Home Loan Bank advances

     390        570        856        1,160   

Long-term debt

     2,375        2,747        4,747        5,527   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total interest expense

     9,944        17,985        21,301        37,558   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue

     56,392        58,517        114,810        114,474   

Provision for loan losses

     18,000        11,000        33,000        201,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue after provision for loan losses

     38,392        47,517        81,810        (86,526
  

 

 

   

 

 

   

 

 

   

 

 

 

Fee revenue:

        

Service charges and fees

     7,816        7,608        15,599        14,328   

Mortgage loan and other related fees

     2,322        952        4,421        2,446   

Brokerage fees

     809        691        1,622        1,368   

Securities gains, net

     6,490        783        7,047        838   

Loss from prepayment of debt

     (6,199     (791     (6,681     (791

Other

     1,629        4,662        6,238        7,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total fee revenue

     12,867        13,905        28,246        25,743   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue

     51,259        61,422        110,056        (60,783
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Salaries and employee benefits

     24,297        26,436        49,522        51,360   

Communications and equipment

     3,211        3,378        6,366        6,722   

Occupancy

     3,539        3,805        7,310        7,879   

Advertising and public relations

     1,088        1,317        1,934        2,295   

Postage, printing and supplies

     916        1,085        1,895        2,203   

Professional fees

     1,952        2,350        3,927        5,680   

Foreclosed property

     1,851        1,891        5,676        66,790   

FDIC assessments and other regulatory charges

     2,545        3,644        5,055        9,057   

Amortization of intangibles

     730        760        1,462        1,522   

Other

     4,181        4,062        8,118        10,491   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     44,310        48,728        91,265        163,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     6,949        12,694        18,791        (224,782

Income tax expense

     450        666        764        526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     6,499        12,028        18,027        (225,308

Preferred stock dividends and discount accretion

     3,032        3,016        6,062        5,794   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common shareholders

   $ 3,467      $ 9,012      $ 11,965      $ (231,102
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share - Basic

   $ .06      $ .35      $ .21      $ (10.52

Earnings (loss) per common share - Diluted

     .06        .16        .21        (10.52

Weighted average common shares outstanding - Basic

     57,840        25,427        57,803        21,965   

Weighted average common shares outstanding - Diluted

     57,840        57,543        57,803        21,965   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Comprehensive (Loss) Income (Unaudited)

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  

(in thousands)

   2012     2011     2012     2011  

Net income (loss)

   $ 6,499      $ 12,028      $ 18,027      $ (225,308

Other comprehensive loss:

        

Unrealized (losses) gains on available for sale securities:

        

Unrealized holding gains arising during period

     4,264        10,967        924        10,008   

Reclassification adjustment for gains included in net income

     (6,490     (783     (7,047     (838

Amortization of gains included in net income (loss) on available for sale securities transferred to held to maturity

     (400     (504     (813     (1,167

Amortization of gains included in net income (loss) on derivative financial instruments accounted for as cash flow hedges

     (714     (5,399     (2,314     (9,622

Unrealized losses on derivative financial instruments accounted for as cash flow hedges

     (4,855       (4,855  

Amortization of prior service cost and actuarial losses included in net periodic pension cost for defined benefit pension plans

     154        —          308        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive (loss) income

     (8,041     4,281        (13,797     (1,619
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive (loss) income

   $ (1,542   $ 16,309      $ 4,230      $ (226,927
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Balance Sheet

 

     June 30,     December 31,     June 30,  
     2012     2011     2011  
(in thousands, except share and per share data)    (unaudited)     (audited)     (unaudited)  

ASSETS

      

Cash and due from banks

   $ 50,596      $ 53,807      $ 163,331   

Interest-bearing deposits in banks

     133,857        139,609        41,863   

Federal funds sold, reverse repurchase agreements, commercial paper and short-term investments

     120,000        185,000        174,996   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents

     304,453        378,416        380,190   

Securities available for sale

     1,701,583        1,790,047        1,816,613   

Securities held to maturity (fair value $299,971, $343,531 and $379,231)

     282,750        330,203        371,578   

Mortgage loans held for sale

     18,645        23,881        19,406   

Loans, net of unearned income

     4,119,235        4,109,614        4,163,447   

Less allowance for loan losses

     112,705        114,468        127,638   
  

 

 

   

 

 

   

 

 

 

Loans, net

     4,006,530        3,995,146        4,035,809   

Assets covered by loss sharing agreements with the FDIC

     65,914        78,145        95,726   

Premises and equipment, net

     172,200        175,088        178,208   

Bank owned life insurance

     81,265        80,599        80,134   

Accrued interest receivable

     20,151        20,693        21,291   

Goodwill and other intangible assets

     6,965        8,428        9,922   

Foreclosed property

     30,421        32,859        47,584   

Other assets

     46,229        69,915        95,834   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 6,737,106      $ 6,983,420      $ 7,152,295   
  

 

 

   

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

      

Liabilities:

      

Deposits:

      

Demand

   $ 1,150,444      $ 992,109      $ 899,017   

NOW

     1,196,507        1,509,896        1,306,109   

Money market

     1,117,139        1,038,778        989,600   

Savings

     219,077        199,007        197,927   

Time:

      

Less than $100,000

     1,164,451        1,332,394        1,508,444   

Greater than $100,000

     764,343        847,152        981,154   

Brokered

     210,506        178,647        300,964   
  

 

 

   

 

 

   

 

 

 

Total deposits

     5,822,467        6,097,983        6,183,215   

Federal funds purchased, repurchase agreements, and other short-term borrowings

     53,656        102,577        103,666   

Federal Home Loan Bank advances

     125,125        40,625        40,625   

Long-term debt

     120,265        120,225        150,186   

Unsettled securities purchases

     —          10,325        35,634   

Accrued expenses and other liabilities

     39,598        36,199        36,368   
  

 

 

   

 

 

   

 

 

 

Total liabilities

     6,161,111        6,407,934        6,549,694   
  

 

 

   

 

 

   

 

 

 

Shareholders’ equity:

      

Preferred stock, $1 par value; 10,000,000 shares authorized;

      

Series A; $10 stated value; 21,700 shares issued and outstanding

     217        217        217   

Series B; $1,000 stated value; 180,000 shares issued and outstanding

     177,814        177,092        176,392   

Series D; $1,000 stated value; 16,613 shares issued and outstanding

     16,613        16,613        16,613   

Common stock, $1 par value; 100,000,000 shares authorized;

      

41,726,509, 41,647,100 and 41,554,874 shares issued and outstanding

     41,727        41,647        41,555   

Common stock, non-voting, $1 par value; 30,000,000 shares authorized;

      

15,914,209 shares issued and outstanding

     15,914        15,914        15,914   

Common stock issuable; 94,657, 93,681 and 83,575 shares

     2,893        3,233        3,574   

Capital surplus

     1,056,819        1,054,940        1,052,482   

Accumulated deficit

     (718,896     (730,861     (723,378

Accumulated other comprehensive (loss) income

     (17,106     (3,309     19,232   
  

 

 

   

 

 

   

 

 

 

Total shareholders’ equity

     575,995        575,486        602,601   
  

 

 

   

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 6,737,106      $ 6,983,420      $ 7,152,295   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

5


Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Changes in Shareholders’ Equity (Unaudited)

For the Six Months Ended June 30,

 

    Preferred Stock           Non-Voting     Common                 Accumulated
Other
       
(in thousands, except share   Series     Series     Series     Series     Series     Common     Common     Stock     Capital     Accumulated     Comprehensive        

and per share data)          

  A     B     D     F     G     Stock     Stock     Issuable     Surplus     Deficit     Income (Loss)     Total  

Balance, December 31, 2010

  $ 217      $ 175,711      $ —        $ —        $ —        $ 18,937      $ —        $ 3,894      $ 741,244      $ (492,276   $ 20,851      $ 468,578   

Net loss

                      (225,308       (225,308

Other comprehensive loss

                        (1,619     (1,619

Preferred for common equity exchange related to tax benefits preservation plan (1,551,126 common shares)

        16,613            (1,551         (15,062         —     

Penalty received on incomplete private equity transaction, net of tax expense

                    3,250            3,250   

Conversion of Series F and Series G Preferred Stock (20,618,156 voting and 15,914,209 non-voting common shares)

          (195,872     (151,185     20,618        15,914          310,525            —     

Common stock issued to dividend reinvestment plan and employee benefit plans (78,584 shares)

              79            665            744   

Common and preferred stock issued (3,467,699 common shares)

          195,872        151,185        3,468            11,035            361,560   

Amortization of stock options and restricted stock awards

                    758            758   

Vesting of restricted stock (1,417 shares issued, 6,382 shares deferred)

              1          54        (55         —     

Deferred compensation plan, net, including dividend equivalents

                  127              127   

Shares issued from deferred compensation plan (3,209 shares)

              3          (501     498            —     

Tax on option exercise and restricted stock vesting

                    (376         (376

Preferred stock dividends:

                       

Series A

                      (7       (7

Series B

      681                      (5,200       (4,519

Series D

                      (587       (587
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2011

  $ 217      $ 176,392      $ 16,613      $ —        $ —        $ 41,555      $ 15,914      $ 3,574      $ 1,052,482      $ (723,378   $ 19,232      $ 602,601   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

  $ 217      $ 177,092      $ 16,613      $ —        $ —        $ 41,647      $ 15,914      $ 3,233      $ 1,054,940      $ (730,861   $ (3,309   $ 575,486   

Net income

                      18,027          18,027   

Other comprehensive loss

                        (13,797     (13,797

Common stock issued to dividend reinvestment plan and to employee benefit plans (60,982 shares)

              61            440            501   

Amortization of stock options and restricted stock awards

                    946            946   

Vesting of restricted stock (15,790 shares issued, (8,399 shares deferred)

              16          (151     206            71   

Deferred compensation plan, net, including dividend equivalents

                  101              101   

Shares issued from deferred compensation plan (2,637 shares)

              3          (290     287            —     

Preferred stock dividends:

                       

Series A

                      (6       (6

Series B

      722                      (5,222       (4,500

Series D

                      (834       (834
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

  $ 217      $ 177,814      $ 16,613      $ —        $ —        $ 41,727      $ 15,914      $ 2,893      $ 1,056,819      $ (718,896   $ (17,106   $ 575,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

6


Table of Contents

UNITED COMMUNITY BANKS, INC.

Consolidated Statement of Cash Flows (Unaudited)

 

     Six Months Ended  
     June 30,  

(in thousands)

   2012     2011  

Operating activities:

    

Net income (loss)

   $ 18,027      $ (225,308

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation, amortization and accretion

     16,511        9,374   

Provision for loan losses

     33,000        201,000   

Stock based compensation

     946        758   

Securities gains, net

     (7,047     (838

Losses and write downs on sales of other real estate owned

     2,943        60,505   

Loss on prepayment of borrowings

     6,681        791   

Changes in assets and liabilities:

    

Other assets and accrued interest receivable

     22,783        29,332   

Accrued expenses and other liabilities

     (6,754     1,078   

Mortgage loans held for sale

     5,236        16,502   
  

 

 

   

 

 

 

Net cash provided by operating activities

     92,326        93,194   
  

 

 

   

 

 

 

Investing activities:

    

Investment securities held to maturity:

    

Proceeds from maturities and calls

     45,741        34,742   

Purchases

     —          (141,862

Investment securities available for sale:

    

Proceeds from sales

     371,103        106,603   

Proceeds from maturities and calls

     289,985        220,018   

Purchases

     (580,652     (875,250

Net (increase) decrease in loans

     (58,765     64,778   

Proceeds from loan sales

     —          99,298   

Proceeds collected from FDIC under loss sharing agreements

     5,054        11,852   

Proceeds from sales of premises and equipment

     664        534   

Purchases of premises and equipment

     (2,581     (5,276

Proceeds from sale of other real estate

     14,620        60,310   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     85,169        (424,253
  

 

 

   

 

 

 

Financing activities:

    

Net change in deposits

     (275,516     (285,957

Net change in federal funds purchased, repurchase agreements, and other short-term borrowings

     (53,401     2,599   

Proceeds from Federal Home Loan Bank advances

     1,489,000        —     

Settlement of Federal Home Loan Bank advances

     (1,406,701     (15,291

Proceeds from issuance of common stock for dividend reinvestment and employee benefit plans

     501        744   

Proceeds from issuance of common and preferred stock, net of offering costs

     —          361,560   

Proceeds from penalty on incomplete private equity transaction

     —          3,250   

Cash dividends on preferred stock

     (5,341     (5,113
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (251,458     61,792   
  

 

 

   

 

 

 

Net change in cash and cash equivalents

     (73,963     (269,267

Cash and cash equivalents at beginning of period

     378,416        649,457   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 304,453      $ 380,190   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information:

    

Cash paid (received) during the period for:

    

Interest

   $ 23,222      $ 36,703   

Income taxes

     (27,105     1,527   

Unsettled securities purchases

     —          35,634   

See accompanying notes to consolidated financial statements.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

Note 1 – Accounting Policies

The accounting and financial reporting policies of United Community Banks, Inc. (“United”) and its subsidiaries conform to accounting principles generally accepted in the United States of America (“GAAP”) and general banking industry practices. The accompanying interim consolidated financial statements have not been audited. All material intercompany balances and transactions have been eliminated. A more detailed description of United’s accounting policies is included in its Annual Report on Form 10-K for the year ended December 31, 2011.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying financial statements have been made. These adjustments are normal and recurring accruals considered necessary for a fair and accurate presentation. The results for interim periods are not necessarily indicative of results for the full year or any other interim periods.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the fair value, less cost to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to operating expenses. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) 360-20, Real Estate Sales.

Note 2 – Accounting Standards Updates

In July 2012, the Financial Accounting Standards Board issued Accounting Standards Update No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (the revised standard). It allows companies to perform a “qualitative” assessment to determine whether further impairment testing of indefinite-lived intangible assets is necessary, similar in approach to the goodwill impairment test. The revised standard is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, and entities can choose to early adopt the revised guidance. It is not expected to have a material impact on United’s financial position, results of operations or disclosures.

Note 3 – Mergers and Acquisitions

On June 19, 2009, United Community Bank (“UCB” or the “Bank”) purchased substantially all the assets and assumed substantially all the liabilities of Southern Community Bank (“SCB”) from the Federal Deposit Insurance Corporation (“FDIC”), as Receiver of SCB. UCB and the FDIC entered loss sharing agreements regarding future losses incurred on loans and foreclosed loan collateral existing at June 19, 2009. Under the terms of the loss sharing agreements, the FDIC will absorb 80 percent of losses and share 80 percent of loss recoveries on the first $109 million of losses and, absorb 95 percent of losses and share in 95 percent of loss recoveries on losses exceeding $109 million. The term for loss sharing on 1-4 Family loans is ten years, while the term for loss sharing on all other loans is five years.

Under the loss sharing agreement, the portion of the losses expected to be indemnified by the FDIC is considered an indemnification asset in accordance with ASC 805 Business Combinations. The indemnification asset, referred to as “estimated loss reimbursement from the FDIC,” is included in the balance of “Assets covered by loss sharing agreements with the FDIC” on the Consolidated Balance Sheet. The indemnification asset was recognized at fair value, which was estimated at the acquisition date based on the terms of the loss sharing agreement. The indemnification asset is expected to be collected over a four-year average life. No valuation allowance was required.

Loans, foreclosed property and the estimated FDIC reimbursement resulting from the loss sharing agreements with the FDIC are reported as “Assets covered by loss sharing agreements with the FDIC” in the consolidated balance sheet.

The table below shows the components of covered assets at June 30, 2012 (in thousands).

 

(in thousands)

   Purchased
Impaired
Loans
     Other
Purchased
Loans
     Other      Total  

Commercial (secured by real estate)

   $ —         $ 28,021       $ —         $ 28,021   

Commercial & industrial

     —           1,473         —           1,473   

Construction and land development

     525         4,709         —           5,234   

Residential mortgage

     145         6,429         —           6,574   

Consumer installment

     —           152         —           152   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered loans

     670         40,784         —           41,454   

Covered foreclosed property

     —           —           14,098         14,098   

Estimated loss reimbursement from the FDIC

     —           —           10,362         10,362   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total covered assets

   $ 670       $ 40,784       $ 24,460       $ 65,914   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Note 4 – Reverse Repurchase Agreements

United enters into reverse repurchase agreements in order to invest short-term funds. In addition, United enters into repurchase agreements and reverse repurchase agreements with the same counterparty in transactions commonly referred to as collateral swaps that are subject to master netting agreements under which the balances are netted in the balance sheet in accordance with ASC 210-20, Offsetting. The following table presents a summary of amounts outstanding under reverse repurchase agreements including those entered into in connection with repurchase agreements with the same counterparty under master netting agreements (in thousands).

 

     June 30, 2012  
     Reverse
Repurchase
Agreements
(Assets)
    Repurchase
Agreements
(Liabilities)
    Net Reported
Balance (Asset)
 

Amounts subject to master netting agreements

   $ 200,000      $ 200,000      $ —     

Other reverse repurchase agreements

     120,000        —          120,000   
  

 

 

   

 

 

   

 

 

 

Total

   $ 320,000      $ 200,000      $ 120,000   
  

 

 

   

 

 

   

 

 

 

Weighted average interest rate

     1.27     .41  

In addition to the collateral swap transactions, United has entered into offsetting securities lending agreements with counterparties that function similar to the collateral swaps. United had $80.0 million in offsetting securities lending positions outstanding at June 30, 2012.

Note 5 – Securities

Realized gains and losses are derived using the specific identification method for determining the cost of securities sold. The following table summarizes securities sales activity for the three and six month periods ended June 30, 2012 and 2011 (in thousands).

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012      2011     2012      2011  

Proceeds from sales

   $ 265,992       $ 55,363      $ 371,103       $ 106,603   
  

 

 

    

 

 

   

 

 

    

 

 

 

Gross gains on sales

   $ 6,490       $ 838      $ 7,047       $ 1,169   

Gross losses on sales

     —           (55     —           (331
  

 

 

    

 

 

   

 

 

    

 

 

 

Net gains on sales of securities

   $ 6,490       $ 783      $ 7,047       $ 838   
  

 

 

    

 

 

   

 

 

    

 

 

 

Securities with a carrying value of $1.29 billion, $1.72 billion, and $2.11 billion were pledged to secure public deposits, FHLB advances and other secured borrowings at June 30, 2012, December 31, 2011 and June 30, 2011, respectively. Substantial borrowing capacity remains available under borrowing arrangements with the FHLB with currently pledged securities.

Securities are classified as held to maturity when management has the positive intent and ability to hold them until maturity. Securities held to maturity are carried at amortized cost.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The amortized cost, gross unrealized gains and losses and fair value of securities held to maturity at June 30, 2012, December 31, 2011 and June 30, 2011 are as follows (in thousands).

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

As of June 30, 2012

           

State and political subdivisions

   $ 51,801       $ 5,586       $ —         $ 57,387   

Mortgage-backed securities (1)

     230,949         11,635         —           242,584   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 282,750       $ 17,221       $ —         $ 299,971   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

           

U.S. Government agencies

   $ 5,000       $ 6       $ —         $ 5,006   

State and political subdivisions

     51,903         4,058         13         55,948   

Mortgage-backed securities (1)

     273,300         9,619         342         282,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 330,203       $ 13,683       $ 355       $ 343,531   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011

           

U.S. Government agencies

   $ 5,000       $ —         $ —         $ 5,000   

State and political subdivisions

     49,122         1,823         292         50,653   

Mortgage-backed securities (1)

     317,456         6,184         62         323,578   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 371,578       $ 8,007       $ 354       $ 379,231   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

All are residential type mortgage-backed securities

The cost basis, unrealized gains and losses, and fair value of securities available for sale at June 30, 2012, December 31, 2011 and June 30, 2011 are presented below (in thousands).

 

     Amortized
Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 

As of June 30, 2012

           

U.S. Government agencies

   $ 43,618       $ 256       $ —         $ 43,874   

State and political subdivisions

     25,704         1,462         7         27,159   

Mortgage-backed securities (1)

     1,408,047         25,723         339         1,433,431   

Corporate bonds

     119,198         —           9,160         110,038   

Asset-backed securities

     85,090         —           592         84,498   

Other

     2,583         —           —           2,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,684,240       $ 27,441       $ 10,098       $ 1,701,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

           

U.S. Government agencies

   $ 43,592       $ 158       $ —         $ 43,750   

State and political subdivisions

     24,997         1,345         3         26,339   

Mortgage-backed securities (1)

     1,576,064         33,988         143         1,609,909   

Corporate bonds

     119,110         —           11,432         107,678   

Other

     2,371         —           —           2,371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,766,134       $ 35,491       $ 11,578       $ 1,790,047   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011

           

U.S. Government agencies

   $ 77,930       $ 61       $ 514       $ 77,477   

State and political subdivisions

     25,569         1,207         4         26,772   

Mortgage-backed securities (1)

     1,556,910         35,991         283         1,592,618   

Corporate bonds

     119,021         100         1,827         117,294   

Other

     2,452         —           —           2,452   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,781,882       $ 37,359       $ 2,628       $ 1,816,613   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

All are residential type mortgage-backed securities

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The following table summarizes held to maturity securities in an unrealized loss position as of, December 31, 2011 and June 30, 2011 (in thousands). As of June 30, 2012, there were no held to maturity securities in an unrealized loss position.

 

     Less than 12 Months      12 Months or More      Total  
      Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

As of December 31, 2011

                 

State and political subdivisions

   $ —         $ —         $ 363       $ 13       $ 363       $ 13   

Mortgage-backed securities

     10,967         342         —           —           10,967         342   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 10,967       $ 342       $ 363       $ 13       $ 11,330       $ 355   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011

                 

State and political subdivisions

   $ 10,160       $ 292       $ —         $ —         $ 10,160       $ 292   

Mortgage-backed securities

     25,160         60         1,937         2         27,097         62   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 35,320       $ 352       $ 1,937       $ 2       $ 37,257       $ 354   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The following table summarizes available for sale securities in an unrealized loss position as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).

 

     Less than 12 Months      12 Months or More      Total  
      Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
     Fair Value      Unrealized
Loss
 

As of June 30, 2012

                 

State and political subdivisions

   $ 5,696       $ 3       $ 11       $ 4       $ 5,707       $ 7   

Mortgage-backed securities

     104,644         332         19,436         7         124,080         339   

Corporate bonds

     16,500         3,500         93,488         5,660         109,988         9,160   

Asset-backed securities

     74,097         592         —           —           74,097         592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 200,937       $ 4,427       $ 112,935       $ 5,671       $ 313,872       $ 10,098   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                 

State and political subdivisions

   $ —         $ —         $ 11       $ 3       $ 11       $ 3   

Mortgage-backed securities

     98,687         110         22,719         33         121,406         143   

Corporate bonds

     42,864         5,197         64,765         6,235         107,629         11,432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 141,551       $ 5,307       $ 87,495       $ 6,271       $ 229,046       $ 11,578   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011

                 

U.S. Government agencies

   $ 54,482       $ 514       $ —         $ —         $ 54,482       $ 514   

State and political subdivisions

     301         —           10         4         311         4   

Mortgage-backed securities

     169,907         283         —           —           169,907         283   

Corporate bonds

     97,145         1,827         —           —           97,145         1,827   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total unrealized loss position

   $ 321,835       $ 2,624       $ 10       $ 4       $ 321,845       $ 2,628   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, there were 36 available for sale securities and no held to maturity securities that were in an unrealized loss position. United does not intend to sell nor believes it will be required to sell securities in an unrealized loss position prior to the recovery of their amortized cost basis. Unrealized losses at June 30, 2012 were primarily attributable to changes in interest rates, however the unrealized losses in corporate bonds also reflect downgrades in the underlying securities ratings. The bonds remain above investment grade and United does not consider them to be impaired. Unrealized losses at June 30, 2011 were primarily attributable to changes in interest rates.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to the length of time and the extent to which the fair value has been less than cost, the financial condition and near-term prospects of the issuer, among other factors. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies, whether downgrades by bond rating agencies have occurred, and industry analyst’s reports. No impairment charges were recognized during the second quarter or six months ended June 30, 2012 or 2011.

The amortized cost and fair value of held to maturity and available for sale securities at June 30, 2012, by contractual maturity, are presented in the following table (in thousands).

 

     Available for Sale      Held to Maturity  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

U.S. Government agencies:

           

5 to 10 years

   $ 43,618       $ 43,874       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     43,618         43,874         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

State and political subdivisions:

           

Within 1 year

     6,567         6,576         —           —     

1 to 5 years

     14,960         15,982         6,826         7,419   

5 to 10 years

     3,329         3,676         21,808         24,264   

More than 10 years

     848         925         23,167         25,704   
  

 

 

    

 

 

    

 

 

    

 

 

 
     25,704         27,159         51,801         57,387   
  

 

 

    

 

 

    

 

 

    

 

 

 

Corporate bonds:

           

1 to 5 years

     28,198         27,182         —           —     

5 to 10 years

     90,000         82,556         —           —     

More than 10 years

     1,000         300         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     119,198         110,038         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Asset-backed securities

           

5 to 10 years

     85,090         84,498         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     85,090         84,498         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Other:

           

More than 10 years

     2,583         2,583         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     2,583         2,583         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total securities other than mortgage-backed securities:

           

Within 1 year

     6,567         6,576         —           —     

1 to 5 years

     43,158         43,164         6,826         7,419   

5 to 10 years

     222,037         214,604         21,808         24,264   

More than 10 years

     4,431         3,808         23,167         25,704   

Mortgage-backed securities

     1,408,047         1,433,431         230,949         242,584   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,684,240       $ 1,701,583       $ 282,750       $ 299,971   
  

 

 

    

 

 

    

 

 

    

 

 

 

Expected maturities may differ from contractual maturities because issuers and borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

12


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Note 6 – Loans and Allowance for Loan Losses

Major classifications of loans as of June 30, 2012, December 31, 2011 and June 30, 2011, are summarized as follows (in thousands).

 

     June 30,      December 31,      June 30,  
     2012      2011      2011  

Commercial (secured by real estate)

   $ 1,836,477       $ 1,821,414       $ 1,741,754   

Commercial & industrial

     450,222         428,249         428,058   

Commercial construction

     169,338         164,155         195,190   
  

 

 

    

 

 

    

 

 

 

Total commercial

     2,456,037         2,413,818         2,365,002   

Residential mortgage

     1,128,336         1,134,902         1,177,226   

Residential construction

     408,966         448,391         501,909   

Consumer installment

     125,896         112,503         119,310   
  

 

 

    

 

 

    

 

 

 

Total loans

     4,119,235         4,109,614         4,163,447   

Less allowance for loan losses

     112,705         114,468         127,638   
  

 

 

    

 

 

    

 

 

 

Loans, net

   $ 4,006,530       $ 3,995,146       $ 4,035,809   
  

 

 

    

 

 

    

 

 

 

The Bank makes loans and extensions of credit to individuals and a variety of firms and corporations located primarily in counties in north Georgia, the Atlanta, Georgia metropolitan statistical area, the Gainesville, Georgia metropolitan statistical area, coastal Georgia, western North Carolina and east Tennessee. Although the Bank has a diversified loan portfolio, a substantial portion of the loan portfolio is collateralized by improved and unimproved real estate and is dependent upon the real estate market.

Changes in the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 are summarized as follows (in thousands).

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Balance beginning of period

   $ 113,601       $ 133,121       $ 114,468       $ 174,695   

Provision for loan losses

     18,000         11,000         33,000         201,000   

Charge-offs:

           

Commercial (secured by real estate)

     4,418         3,433         8,346         52,140   

Commercial & industrial

     888         604         1,644         4,966   

Commercial construction

     88         980         452         50,695   

Residential mortgage

     4,014         4,667         9,781         41,343   

Residential construction

     9,846         6,769         15,475         99,024   

Consumer installment

     408         883         1,161         1,979   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     19,662         17,336         36,859         250,147   
  

 

 

    

 

 

    

 

 

    

 

 

 

Recoveries:

           

Commercial (secured by real estate)

     69         174         300         274   

Commercial & industrial

     113         81         200         403   

Commercial construction

     —           111         30         111   

Residential mortgage

     152         78         544         371   

Residential construction

     283         140         598         257   

Consumer installment

     149         269         424         674   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total recoveries

     766         853         2,096         2,090   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     18,896         16,483         34,763         248,057   
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 112,705       $ 127,638       $ 112,705       $ 127,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The following table presents the balance and activity in the allowance for loan losses by portfolio segment and the recorded investment in loans by portfolio segment based on the impairment method as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).

 

     Commercial
(Secured by
Real Estate)
    Commercial &
Industrial
    Commercial
Construction
    Residential
Mortgage
    Residential
Construction
    Consumer
Installment
    Unallocated     Total  

Six Months Ended June 30, 2012

               

Allowance for loan losses:

               

Beginning balance

  $ 31,644      $ 5,681      $ 6,097      $ 29,076      $ 30,379      $ 2,124      $ 9,467      $ 114,468   

Charge-offs

    (8,346     (1,644     (452     (9,781     (15,475     (1,161     —          (36,859

Recoveries

    300        200        30        544        598        424        —          2,096   

Provision

    6,288        1,061        4,662        6,471        13,712        1,183        (377     33,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 29,886      $ 5,298      $ 10,337      $ 26,310      $ 29,214      $ 2,570      $ 9,090      $ 112,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance attributable to loans:

               

Individually evaluated for impairment

  $ 8,544      $ 753      $ 2,476      $ 1,389      $ 4,188      $ 20      $ —        $ 17,370   

Collectively evaluated for impairment

    21,342        4,545        7,861        24,921        25,026        2,550        9,090        95,335   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 29,886      $ 5,298      $ 10,337      $ 26,310      $ 29,214      $ 2,570      $ 9,090      $ 112,705   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Individually evaluated for impairment

  $ 130,838      $ 57,747      $ 42,833      $ 19,844      $ 41,906      $ 511      $ —        $ 293,679   

Collectively evaluated for impairment

    1,705,639        392,475        126,505        1,108,492        367,060        125,385        —          3,825,556   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 1,836,477      $ 450,222      $ 169,338      $ 1,128,336      $ 408,966      $ 125,896      $ —        $ 4,119,235   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

December 31, 2011

               

Allowance for loan losses:

               

Ending allowance attributable to loans:

               

Individually evaluated for impairment

  $ 7,491      $ 1,117      $ 236      $ 2,234      $ 3,731      $ 16      $ —        $ 14,825   

Collectively evaluated for impairment

    24,153        4,564        5,861        26,842        26,648        2,108        9,467        99,643   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 31,644      $ 5,681      $ 6,097      $ 29,076      $ 30,379      $ 2,124      $ 9,467      $ 114,468   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Individually evaluated for impairment

  $ 107,831      $ 57,828      $ 26,245      $ 18,376      $ 46,687      $ 292      $ —        $ 257,259   

Collectively evaluated for impairment

    1,713,583        370,421        137,910        1,116,526        401,704        112,211        —          3,852,355   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 1,821,414      $ 428,249      $ 164,155      $ 1,134,902      $ 448,391      $ 112,503      $ —        $ 4,109,614   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Six Months Ended June 30, 2011

               

Allowance for loan losses:

               

Beginning balance

  $ 31,191      $ 7,580      $ 6,780      $ 22,305      $ 92,571      $ 3,030      $ 11,238      $ 174,695   

Charge-offs

    (52,140     (4,966     (50,695     (41,343     (99,024     (1,979     —          (250,147

Recoveries

    274        403        111        371        257        674        —          2,090   

Provision

    42,671        4,016        51,256        49,063        55,249        498        (1,753     201,000   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

  $ 21,996      $ 7,033      $ 7,452      $ 30,396      $ 49,053      $ 2,223      $ 9,485      $ 127,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending allowance attributable to loans:

               

Individually evaluated for impairment

  $ 78      $ —        $ 450      $ 639      $ —        $ —        $ —        $ 1,167   

Collectively evaluated for impairment

    21,918        7,033        7,002        29,757        49,053        2,223        9,485        126,471   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending allowance balance

  $ 21,996      $ 7,033      $ 7,452      $ 30,396      $ 49,053      $ 2,223      $ 9,485      $ 127,638   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans:

               

Individually evaluated for impairment

  $ 14,780      $ —        $ 1,015      $ 7,247      $ 12,611      $ —        $ —        $ 35,653   

Collectively evaluated for impairment

    1,726,974        428,058        194,175        1,169,979        489,298        119,310        —          4,127,794   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

  $ 1,741,754      $ 428,058      $ 195,190      $ 1,177,226      $ 501,909      $ 119,310      $ —        $ 4,163,447   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

In calculating specific reserves, United reviews all loans that are on nonaccrual with a balance of $500,000 or greater for impairment, as well as accruing substandard relationships greater than $2 million and all troubled debt restructurings (“TDRs”). A loan is considered impaired when, based on current events and circumstances, it is probable that all amounts due, according to the contractual terms of the loan, will not be collected. All troubled debt restructurings are considered impaired regardless of accrual status. Impaired loans are measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, at the loan’s observable market price, or the fair value of the collateral if the loan is collateral dependent. Interest payments received on impaired nonaccrual loans are applied as a reduction of the outstanding principal balance. For impaired loans not on nonaccrual status, interest is accrued according to the terms of the loan agreement. Impairment amounts are recorded quarterly and specific reserves are recorded in the allowance for loan losses.

At June 30, 2012, December 31, 2011 and June 30, 2011, loans with a carrying value of $1.61 billion, $1.52 billion and $991 million were pledged as collateral to secure FHLB advances and other contingent funding sources.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

In the first quarter of 2011, United’s Board of Directors adopted an accelerated problem asset disposition plan which included the bulk sale of $267 million in classified loans. Those loans were classified as held for sale at the end of the first quarter and were written down to the expected proceeds from the sale. The charge-offs on the loans transferred to held for sale in anticipation of the bulk loan sale which closed on April 18, 2011, increased first quarter 2011 loan charge-offs by $186 million. The actual loss on the bulk loan sale at closing was less than the amount charged-off in the first quarter, resulting in a $7.27 million reduction of second quarter 2011 charge-offs.

The recorded investments in individually evaluated impaired loans at June 30, 2012, December 31, 2011 and June 30, 2011 were as follows (in thousands).

 

     June 30,      December 31,      June 30,  
     2012      2011      2011  

Period-end loans with no allocated allowance for loan losses

   $ 214,808       $ 188,509       $ 32,791   

Period-end loans with allocated allowance for loan losses

     78,871         68,750         2,862   
  

 

 

    

 

 

    

 

 

 

Total

   $ 293,679       $ 257,259       $ 35,653   
  

 

 

    

 

 

    

 

 

 

Amount of allowance for loan losses allocated

   $ 17,370       $ 14,825       $ 1,167   

The average balances of impaired loans and income recognized on impaired loans while they were considered impaired is presented below for the three and six months ended June 30, 2012 and 2011 (in thousands).

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Average balance of individually evaluated impaired loans during period

   $ 287,336       $ 42,099       $ 283,981       $ 68,631   

Interest income recognized during impairment

     2,421         —           4,688         —     

Cash-basis interest income recognized

     3,216         —           6,408         —     

 

15


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).

 

    June 30, 2012     December 31, 2011     June 30, 2011  
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
    Unpaid
Principal
Balance
    Recorded
Investment
    Allowance
for Loan
Losses
Allocated
 

With no related allowance recorded:

                 

Commercial (secured by real estate)

  $ 105,788      $ 95,543      $ —        $ 82,887      $ 76,215      $ —        $ 19,653      $ 13,572      $ —     

Commercial & industrial

    81,036        56,036        —          77,628        52,628        —          —          —          —     

Commercial construction

    22,491        21,372        —          24,927        23,609        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    209,315        172,951        —          185,442        152,452        —          19,653        13,572        —     

Residential mortgage

    13,994        11,578        —          13,845        10,804        —          10,006        6,608        —     

Residential construction

    46,589        30,094        —          38,955        25,190        —          27,441        12,611        —     

Consumer installment

    185        185        —          63        63        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with no related allowance recorded

    270,083        214,808        —          238,305        188,509        —          57,100        32,791        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

With an allowance recorded:

                 

Commercial (secured by real estate)

    35,348        35,295        8,544        31,806        31,616        7,491        1,398        1,208        78   

Commercial & industrial

    1,711        1,711        753        5,200        5,200        1,117        —          —          —     

Commercial construction

    21,461        21,461        2,476        2,636        2,636        236        1,441        1,015        450   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    58,520        58,467        11,773        39,642        39,452        8,844        2,839        2,223        528   

Residential mortgage

    8,458        8,266        1,389        7,642        7,572        2,234        639        639        639   

Residential construction

    11,886        11,812        4,188        21,629        21,497        3,731        —          —          —     

Consumer installment

    335        326        20        235        229        16        —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total with an allowance recorded

    79,199        78,871        17,370        69,148        68,750        14,825        3,478        2,862        1,167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 349,282      $ 293,679      $ 17,370      $ 307,453      $ 257,259      $ 14,825      $ 60,578      $ 35,653      $ 1,167   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

There were no loans more than 90 days past due and still accruing interest at June 30, 2012, December 31, 2011 or June 30, 2011. Nonaccrual loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually evaluated impaired loans with larger balances.

The following table presents the recorded investment (unpaid principal less amounts charged-off) in nonaccrual loans by loan class as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).

 

     Nonaccrual Loans  
     June 30,
2012
    December 31,
2011
    June 30,
2011
 

Commercial (secured by real estate)

   $ 19,115      $ 27,322      $ 17,764   

Commercial & industrial

     34,982        34,613        1,998   

Commercial construction

     18,175        16,655        2,782   
  

 

 

   

 

 

   

 

 

 

Total commercial

     72,272        78,590        22,544   

Residential mortgage

     16,631        22,358        24,809   

Residential construction

     25,530        25,523        22,643   

Consumer installment

     907        1,008        1,069   
  

 

 

   

 

 

   

 

 

 

Total

   $ 115,340      $ 127,479      $ 71,065   
  

 

 

   

 

 

   

 

 

 

Balance as a percentage of unpaid principal

     68.8     71.3     64.5

 

16


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The following table presents the aging of the recorded investment in past due loans as of June 30, 2012, December 31, 2011 and June 30, 2011 by class of loans (in thousands).

 

     Loans Past Due      Loans Not         
     30 - 59 Days      60 - 89 Days      > 90 Days      Total      Past Due      Total  

As of June 30, 2012

                 

Commercial (secured by real estate)

   $ 7,053       $ 1,342       $ 11,996       $ 20,391       $ 1,816,086       $ 1,836,477   

Commercial & industrial

     663         1,496         389         2,548         447,674         450,222   

Commercial construction

     3,555         133         950         4,638         164,700         169,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     11,271         2,971         13,335         27,577         2,428,460         2,456,037   

Residential mortgage

     12,636         2,980         6,756         22,372         1,105,964         1,128,336   

Residential construction

     4,781         1,189         11,096         17,066         391,900         408,966   

Consumer installment

     971         325         398         1,694         124,202         125,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 29,659       $ 7,465       $ 31,585       $ 68,709       $ 4,050,526       $ 4,119,235   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

              

Commercial (secured by real estate)

   $ 8,036       $ 4,182       $ 10,614       $ 22,832       $ 1,798,582       $ 1,821,414   

Commercial & industrial

     3,869         411         407         4,687         423,562         428,249   

Commercial construction

     166         —           1,128         1,294         162,861         164,155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     12,071         4,593         12,149         28,813         2,385,005         2,413,818   

Residential mortgage

     15,185         4,617         9,071         28,873         1,106,029         1,134,902   

Residential construction

     3,940         2,636         10,270         16,846         431,545         448,391   

Consumer installment

     1,534         308         430         2,272         110,231         112,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 32,730       $ 12,154       $ 31,920       $ 76,804       $ 4,032,810       $ 4,109,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011

              

Commercial (secured by real estate)

   $ 6,990       $ 2,001       $ 11,605       $ 20,596       $ 1,721,158       $ 1,741,754   

Commercial & industrial

     1,496         624         809         2,929         425,129         428,058   

Commercial construction

     930         651         1,985         3,566         191,624         195,190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     9,416         3,276         14,399         27,091         2,337,911         2,365,002   

Residential mortgage

     13,788         3,594         12,678         30,060         1,147,166         1,177,226   

Residential construction

     2,942         2,242         15,774         20,958         480,951         501,909   

Consumer installment

     1,234         353         273         1,860         117,450         119,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 27,380       $ 9,465       $ 43,124       $ 79,969       $ 4,083,478       $ 4,163,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2012 and December 31, 2011, $10.3 million and $8.65 million of specific reserves were allocated to customers whose loan terms have been modified in troubled debt restructurings. There were no specific reserves established for loans considered to be troubled debt restructurings at June 30, 2011. United committed to lend additional amounts totaling up to $490,000, $1.12 million, and $396,000 as of June 30, 2012 and December 31, 2011, and June 30, 2011 respectively, to customers with outstanding loans that are classified as TDRs.

The modification of the terms of the troubled debt restructurings included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date or an extension of the amortization period, any of which are not available in the current market for new debt with similar risk; a permanent reduction of the principal amount; or a restructuring of the borrower’s debt into an A/B note structure.

 

17


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The following table presents additional information on troubled debt restructurings including the number of loan contracts restructured and the pre and post modification recorded investment (dollars in thousands).

 

    June 30, 2012     December 31, 2011     June 30, 2011  
    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
    Number
of
Contracts
    Pre-
Modification

Outstanding
Recorded
Investment
    Post-
Modification

Outstanding
Recorded
Investment
 

Commercial (secured by real estate)

    96      $ 87,104      $ 82,325        74      $ 70,380      $ 69,054        31      $ 24,946      $ 21,998   

Commercial & industrial

    29        3,972        3,972        18        806        806        5        156        156   

Commercial construction

    23        42,796        41,677        11        18,053        18,053        5        9,477        9,477   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    148        133,872        127,974        103        89,239        87,913        41        34,579        31,631   

Residential mortgage

    110        17,613        16,950        80        11,943        11,379        29        3,937        3,784   

Residential construction

    72        25,123        22,178        54        24,921        24,145        46        11,741        10,718   

Consumer installment

    47        521        511        34        298        293        6        111        111   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total loans

    377      $ 177,129      $ 167,613        271      $ 126,401      $ 123,730        122      $ 50,368      $ 46,244   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans modified under the terms of a TDR during the three and six months ended June 30, 2012 are presented in the table below. In addition, the following table presents loans modified under the terms of a TDR that became 90 days or more delinquent during the three and six months ended June 30, 2012, respectively, that were initially restructured within one year prior to the three and six months ended June 30, 2012, respectively (dollars in thousands).

 

     Number of
Contracts
     Pre-
Modification

Outstanding
Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Subsequently Defaulted
During the Three
Months

Ended June 30, 2012
 

Troubled Debt Restructurings for the

Three Months Ended June 30, 2012

            Number of
Contracts
     Recorded
Investment
 

Commercial (secured by real estate)

     10       $ 7,815       $ 7,728         3       $ 2,307   

Commercial & industrial

     7         598         598         1         5   

Commercial construction

     7         7,702         7,702         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     24         16,115         16,028         4         2,312   

Residential mortgage

     20         5,288         5,112         1         27   

Residential construction

     20         7,638         6,361         1         121   

Consumer installment

     8         210         210         1         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     72       $ 29,251       $ 27,711         7       $ 2,466   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Number of
Contracts
     Pre-
Modification

Outstanding
Recorded
Investment
     Post-
Modification

Outstanding
Recorded
Investment
     Subsequently Defaulted
During the Six Months
Ended June 30, 2012
 

Troubled Debt Restructurings for the

Six Months Ended June 30, 2012

            Number of
Contracts
     Recorded
Investment
 

Commercial (secured by real estate)

     34       $ 22,914       $ 21,469         3       $ 2,307   

Commercial & industrial

     17         3,322         3,322         2         48   

Commercial construction

     14         28,483         28,483         2         4,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     65         54,719         53,274         7         6,529   

Residential mortgage

     44         10,567         10,385         4         400   

Residential construction

     34         11,389         9,550         4         1,597   

Consumer installment

     15         270         265         1         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

     158       $ 76,945       $ 73,474         16       $ 8,532   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

18


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Risk Ratings

United categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, current industry and economic trends, among other factors. United analyzes loans individually by classifying the loans as to credit risk. This analysis is performed on a continuous basis. United uses the following definitions for its risk ratings:

Watch. Loans in this category are presently protected from apparent loss; however, weaknesses exist that could cause future impairment, including the deterioration of financial ratios, past due status and questionable management capabilities. These loans require more than the ordinary amount of supervision. Collateral values generally afford adequate coverage, but may not be immediately marketable.

Substandard. These loans are inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged. Specific and well-defined weaknesses exist that may include poor liquidity and deterioration of financial ratios. The loan may be past due and related deposit accounts experiencing overdrafts. There is the distinct possibility that the Company will sustain some loss if deficiencies are not corrected. If possible, immediate corrective action is taken.

Doubtful. Specific weaknesses characterized as Substandard that are severe enough to make collection in full highly questionable and improbable. There is no reliable secondary source of full repayment.

Loss. Loans categorized as Loss have the same characteristics as Doubtful however probability of loss is certain. Loans classified as Loss are charged-off.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are generally deposit account overdrafts that have not been assigned a grade.

As of June 30, 2012, December 31, 2011 and June 30, 2011, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows (in thousands).

 

      Pass      Watch      Substandard      Doubtful /
Loss
     Not Rated      Total  

As of June 30, 2012

                 

Commercial (secured by real estate)

   $ 1,596,879       $ 72,067       $ 167,531       $ —         $ —         $ 1,836,477   

Commercial & industrial

     393,893         4,652         50,899         —           778         450,222   

Commercial construction

     107,201         6,088         56,049         —           —           169,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,097,973         82,807         274,479         —           778         2,456,037   

Residential mortgage

     999,328         39,105         89,903         —           —           1,128,336   

Residential construction

     290,808         47,182         70,976         —           —           408,966   

Consumer installment

     121,153         1,117         3,626         —           —           125,896   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,509,262       $ 170,211       $ 438,984       $ —         $ 778       $ 4,119,235   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2011

                 

Commercial (secured by real estate)

   $ 1,561,204       $ 89,830       $ 170,380       $ —         $ —         $ 1,821,414   

Commercial & industrial

     369,343         7,630         50,366         —           910         428,249   

Commercial construction

     114,817         14,173         35,165         —           —           164,155   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,045,364         111,633         255,911         —           910         2,413,818   

Residential mortgage

     993,779         42,323         98,800         —           —           1,134,902   

Residential construction

     312,527         38,386         97,478         —           —           448,391   

Consumer installment

     107,333         1,411         3,759         —           —           112,503   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,459,003       $ 193,753       $ 455,948       $ —         $ 910       $ 4,109,614   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2011

                 

Commercial (secured by real estate)

   $ 1,508,284       $ 98,175       $ 135,295       $ —         $ —         $ 1,741,754   

Commercial & industrial

     404,704         3,682         18,647         —           1,025         428,058   

Commercial construction

     143,609         17,452         34,129         —           —           195,190   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     2,056,597         119,309         188,071         —           1,025         2,365,002   

Residential mortgage

     1,046,255         35,775         95,196         —           —           1,177,226   

Residential construction

     353,769         51,223         96,917         —           —           501,909   

Consumer installment

     114,718         608         3,984         —           —           119,310   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 3,571,339       $ 206,915       $ 384,168       $ —         $ 1,025       $ 4,163,447   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

19


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Note 7 – Foreclosed Property

Major classifications of foreclosed properties at June 30, 2012, December 31, 2011 and June 30, 2011 are summarized as follows (in thousands).

 

     June 30,     December 31,     June 30,  
     2012     2011     2011  

Commercial real estate

   $ 11,639      $ 10,866      $ 11,944   

Commercial construction

     2,732        3,336        6,764   
  

 

 

   

 

 

   

 

 

 

Total commercial

     14,371        14,202        18,708   

Residential mortgage

     5,868        7,840        11,346   

Residential construction

     22,054        29,799        47,916   
  

 

 

   

 

 

   

 

 

 

Total foreclosed property

     42,293        51,841        77,970   

Less valuation allowance

     11,872        18,982        30,386   
  

 

 

   

 

 

   

 

 

 

Foreclosed property, net

   $ 30,421      $ 32,859      $ 47,584   
  

 

 

   

 

 

   

 

 

 

Balance as a percentage of original loan unpaid principal

     39.3     35.9     32.6

Activity in the valuation allowance for foreclosed property is presented in the following table (in thousands).

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Balance at beginning of period

   $ 17,746      $ 53,023      $ 18,982      $ 16,565   

Additions charged to expense

     1,008        3,118        3,119        51,703   

Direct write downs

     (6,882     (25,755     (10,229     (37,882
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at end of period

   $ 11,872      $ 30,386      $ 11,872      $ 30,386   
  

 

 

   

 

 

   

 

 

   

 

 

 

Expenses related to foreclosed assets include (in thousands).

 

     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Net (gain) loss on sales

   $ (269   $ (3,218   $ (176   $ 8,802   

Provision for unrealized losses

     1,008        3,118        3,119        51,703   

Operating expenses

     1,112        1,991        2,733        6,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total foreclosed property expense

   $ 1,851      $ 1,891      $ 5,676      $ 66,790   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Note 8 – Earnings Per Share

United is required to report on the face of the consolidated statement of operations, earnings (loss) per common share with and without the dilutive effects of potential common stock issuances from instruments such as options, convertible securities and warrants. Basic earnings (loss) per common share is based on the weighted average number of common shares outstanding during the period while the effects of potential common shares outstanding during the period are included in diluted earnings per common share. During the three and six months ended June 30, 2012 and 2011, United accrued dividends on preferred stock, including accretion of discounts, as shown in the following table (in thousands).

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Series A - 6% fixed

   $ 3       $ 4       $ 6       $ 7   

Series B - 5% fixed until December 6, 2013, 9% thereafter

     2,614         2,598         5,222         5,200   

Series D - LIBOR plus 9.6875%, resets quarterly

     415         414         834         587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total preferred stock dividends

   $ 3,032       $ 3,016       $ 6,062       $ 5,794   
  

 

 

    

 

 

    

 

 

    

 

 

 

All preferred stock dividends are payable quarterly.

Series B preferred stock was issued at a discount. Dividend amounts shown include discount accretion for each period.

The preferred stock dividends were subtracted from net income (loss) in order to arrive at net income (loss) available to common shareholders. There is no dilution from potentially dilutive securities for the six months ended June 30, 2011, due to the anti-dilutive effect of the net loss for that period.

The following table sets forth the computation of basic and diluted loss per share for the three and six months ended June 30, 2012 and 2011 (in thousands, except per share data).

 

     Three Months Ended      Six Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Net income (loss) available to common shareholders

   $ 3,467       $ 9,012       $ 11,965       $ (231,102
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares outstanding:

           

Basic

     57,840         25,427         57,803         21,965   

Effect of dilutive securities

           

Convertible securities

     —           32,116         —           —     

Stock options

     —           —           —           —     

Warrants

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     57,840         57,543         57,803         21,965   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings (loss) per common share:

           

Basic

   $ .06       $ .35       $ .21       $ (10.52
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

   $ .06       $ .16       $ .21       $ (10.52
  

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, United had the following potentially dilutive stock options and warrants outstanding: a warrant to purchase 219,908.49 common shares at $61.39 per share issued to the U.S. Treasury in conjunction with the issuance of United’s fixed rate cumulative preferred perpetual stock, Series B; 129,670 common shares issuable upon exercise of warrants attached to trust preferred securities with an exercise price of $100 per share; 502,743 common shares issuable upon exercise of stock options granted to employees with a weighted average exercise price of $97.92; 414,045 shares issuable upon completion of vesting of restricted stock awards; 1,411,765 common shares issuable upon exercise of warrants exercisable at a price equivalent to $21.25 per share granted to Fletcher International Ltd. (“Fletcher”) in connection with a 2010 asset purchase and sale agreement; 2,476,191 common shares issuable upon conversion of preferred stock if Fletcher or its purported assignee exercises its option to purchase $65 million in convertible preferred stock, convertible at $26.25 per share; 1,162,791 common shares issuable upon exercise of warrants, exercisable at a price equivalent to $30.10 per share to be granted to Fletcher or its purported assignee upon exercise of its option to acquire preferred stock; and 1,551,126 common shares issuable upon exercise of warrants owned by Elm Ridge Off Shore Master Fund, Ltd. and Elm Ridge Value Partners, L.P. (collectively, the “Elm Ridge Parties”), exercisable at $12.50 per share.

 

21


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Note 9 – Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

United is exposed to certain risks arising from both its business operations and economic conditions. United principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. United manages interest rate risk primarily by managing the amount, sources, and duration of its investment securities portfolio and debt funding and through the use of derivative financial instruments. Specifically, United enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. United’s derivative financial instruments are used to manage differences in the amount, timing, and duration of United’s known or expected cash receipts and its known or expected cash payments principally related to United’s loans, wholesale borrowings and deposits.

In conjunction with the FASB’s fair value measurement guidance, United made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

The table below presents the fair value of United’s derivative financial instruments as well as their classification on the consolidated balance sheet as of June 30, 2012, December 31, 2011 and June 30, 2011 (in thousands).

Derivatives accounted for as hedges under ASC 815

 

          Fair Value  

Interest Rate

Products

  

Balance Sheet

Location

   June 30,
2012
     December 31,
2011
     June 30,
2011
 

Asset derivatives

   Other assets    $ 68       $ —         $ —     
     

 

 

    

 

 

    

 

 

 

Liability derivatives

   Other liabilities    $ 5,987       $ 422       $ —     
     

 

 

    

 

 

    

 

 

 

Derivatives not accounted for as hedges under ASC 815

 

          Fair Value  

Interest Rate

Products

  

Balance Sheet

Location

   June 30,
2012
     December 31,
2011
     June 30,
2011
 

Asset derivatives

   Other assets    $ 155       $ —         $ —     
     

 

 

    

 

 

    

 

 

 

Liability derivatives

   Other liabilities    $ 155       $ —         $ —     
     

 

 

    

 

 

    

 

 

 

Derivative contracts that are not accounted for as hedges under ASC 815 are between United and certain commercial loan customers with offsetting positions to dealers under a back-to-back swap program.

Cash Flow Hedges of Interest Rate Risk

United’s objectives in using interest rate derivatives are to add stability to net interest revenue and to manage its exposure to interest rate movements. To accomplish this objective, United primarily uses interest rate swaps as part of its interest rate risk management strategy. At June 30, 2012, United’s interest rate swaps designated as cash flow hedges involve the payment of fixed-rate amounts to a counterparty in exchange for United receiving variable-rate payments over the life of the agreements without exchange of the underlying notional amount. United’s current cash flow hedges are for the purpose of converting variable rate deposits and wholesale borrowings to a fixed rate to protect the company in a rising rate environment. The swaps are forward starting and do not become effective until 2014. At June 30, 2012, United had five swap contracts outstanding with a total notional amount of $400 million that were designated as cash flow hedges. United had no active derivative contracts outstanding at December 31, 2011 or June 30, 2011 that were designated as cash flow hedges of interest rate risk.

 

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Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The effective portion of changes in the fair value of derivatives designated, and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense when the swaps become effective in 2014 as interest payments are made on United’s LIBOR based variable-rate wholesale borrowings and indexed deposit accounts. At June 30, 2012, a portion of the amount included in other comprehensive income represents deferred gains from terminated cash flow hedges where the forecasted hedging transaction is expected to remain effective over the remaining unexpired term of the original contract. Such gains are being deferred and recognized over the remaining life of the contract on a straight line basis. During the three and six months ended June 30, 2012, United accelerated the reclassification of $43,000 and $124,000, respectively, in gains from terminated positions as a result of the forecasted transactions becoming probable not to occur. During the next twelve months, United estimates that an additional $2.23 million of the deferred gains on terminated cash flow hedging positions will be reclassified as an increase to interest revenue.

Fair Value Hedges of Interest Rate Risk

United is exposed to changes in the fair value of certain of its fixed rate obligations due to changes in LIBOR, a benchmark interest rate. United uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate swaps designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for United making variable rate payments over the life of the agreements without the exchange of the underlying notional amount. At June 30, 2012, United had seven interest rate swaps with an aggregate notional amount of $104 million that were designated as fair value hedges of interest rate risk. As of June 30, 2011, United had no active derivatives designated as fair value hedges of interest rate risk.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in earnings. United includes the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. During the three and six months ended June 30, 2012, United recognized net losses of $223,000 and $189,000, respectively, related to ineffectiveness of the fair value hedging relationships. United also recognized a net reduction of interest expense of $550,000 and $828,000 for the three and six months ended June 30, 2012, related to United’s fair value hedges, which includes net settlements on the derivatives. There were no active fair value hedges during the first six months of 2011.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of United’s derivative financial instruments on the consolidated statement of operations for the three and six months ended June 30, 2012 and 2011.

Derivatives in Fair Value Hedging Relationships (in thousands).

 

Location of Gain (Loss)

Recognized in Income

on Derivative

   Amount of Gain (Loss) Recognized in
Income on Derivative
     Amount of Gain (Loss) Recognized in
Income on Hedged Item
 
   2012      2011      2012     2011  

Three Months Ended June 30,

          

Other fee revenue

   $ 2,087       $ —         $ (2,310   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Six Months Ended June 30,

          

Other fee revenue

   $ 823       $ —         $ (1,012   $ —     
  

 

 

    

 

 

    

 

 

   

 

 

 

 

23


Table of Contents

UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Derivatives in Cash Flow Hedging Relationships (in thousands).

 

     Amount of Gain (Loss)
Recognized in Other
Comprehensive Income  on
Derivative (Effective Portion)
     Gain (Loss) Reclassified from Accumulated Other
Comprehensive Income  into Income (Effective Portion)
 
     2012     2011      Location    2012      2011  

Three Months Ended June 30,

  

          
        Interest revenue    $ 671       $ 2,589   
        Other income      43         2,809   
          

 

 

    

 

 

 

Interest rate products

   $ (4,855   $ —         Total    $ 714       $ 5,398   
  

 

 

   

 

 

       

 

 

    

 

 

 

Six Months Ended June 30,

             
        Interest revenue    $ 2,190       $ 5,512   
        Other income      124         4,112   
          

 

 

    

 

 

 

Interest rate products

   $ (4,855   $ —         Total    $ 2,314       $ 9,624   
  

 

 

   

 

 

       

 

 

    

 

 

 

Credit-risk-related Contingent Features

United manages its credit exposure on derivatives transactions by entering into a bi-lateral credit support agreement with each counterparty. The credit support agreements require collateralization of exposures beyond specified minimum threshold amounts. The details of these agreements, including the minimum thresholds, vary by counterparty.

United’s agreements with each of its derivative counterparties contain a provision where if either party defaults on any of its indebtedness, then it could also be declared in default on its derivative obligations. The agreements with derivatives counterparties also include provisions that if not met, could result in United being declared in default. United has agreements with certain of its derivative counterparties that contain a provision where if United fails to maintain its status as a well-capitalized institution or is subject to a prompt corrective action directive, the counterparty could terminate the derivative positions and United would be required to settle its obligations under the agreements.

Note 10 – Stock-Based Compensation

United has an equity compensation plan that allows for grants of incentive stock options, nonqualified stock options, restricted stock awards (also referred to as “nonvested stock” awards), stock awards, performance share awards or stock appreciation rights. Options granted under the plan can have an exercise price no less than the fair market value of the underlying stock at the date of grant. The general terms of the plan include a vesting period (usually four years) with an exercisable period not to exceed ten years. Certain option and restricted stock awards provide for accelerated vesting if there is a change in control (as defined in the plan). As of June 30, 2012, 1,351,000 additional awards could be granted under the plan. Through June 30, 2012, incentive stock options, nonqualified stock options, restricted stock awards and units and base salary stock grants had been granted under the plan.

The following table shows stock option activity for the first six months of 2012.

 

Options

   Shares     Weighted-
Average Exercise
Price
     Weighted-
Average
Remaining
Contractual
Term (Years)
     Aggregate
Intrinisic
Value ($000)
 

Outstanding at December 31, 2011

     583,647      $ 94.48         

Forfeited

     (2,472     48.22         

Expired

     (78,432     73.89         
  

 

 

         

Outstanding at June 30, 2012

     502,743        97.92         4.0       $ —     
  

 

 

         

Exercisable at June 30, 2012

     478,452        101.71         3.8         —     
  

 

 

         

 

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UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The fair value of each option is estimated on the date of grant using the Black-Scholes model. No stock options were granted during the six month periods ended June 30, 2012 or 2011.

Compensation expense relating to stock options of $131,000 and $465,000 was included in earnings for the six months ended June 30, 2012 and 2011, respectively. Deferred tax benefits of $50,000 and $181,000, respectively, were included in the determination of income tax expense for the six month periods ended June 30, 2012 and 2011. The amount of compensation expense for both periods was determined based on the fair value of the options at the time of grant, multiplied by the number of options granted that are expected to vest, which was then amortized over the vesting period. The forfeiture rate for options is estimated to be approximately 3% per year. No options were exercised during the first six months of 2012 or 2011.

The table below presents the activity in restricted stock awards for the first six months of 2012.

 

Restricted Stock

   Shares     Weighted-
Average Grant-
Date Fair Value
 

Outstanding at December 31, 2011

     414,644      $ 12.19   

Granted

     29,491        9.36   

Excercised

     (18,690     39.13   

Cancelled

     (11,400     10.25   
  

 

 

   

Outstanding at June 30, 2012

     414,045        11.43   
  

 

 

   

Vested at June 30, 2012

     15,490        35.62   
  

 

 

   

Compensation expense for restricted stock is based on the fair value of restricted stock awards at the time of grant, which is equal to the value of United’s common stock on the date of grant. The value of restricted stock grants that are expected to vest is amortized into expense over the vesting period. For the six months ended June 30, 2012 and 2011, compensation expense of $815,000 and $293,000, respectively, was recognized related to restricted stock awards. The total intrinsic value of the restricted stock was $3.55 million at June 30, 2012.

As of June 30, 2012, there was $3.10 million of unrecognized compensation cost related to non-vested stock options and restricted stock awards granted under the plan. That cost is expected to be recognized over a weighted-average period of 1.93 years. The aggregate grant date fair value of options and restricted stock awards that vested during the six months ended June 30, 2012, was $1.54 million.

Note 11 – Common and Preferred Stock Issued / Common Stock Issuable

United sponsors a Dividend Reinvestment and Share Purchase Plan (“DRIP”) that allows participants who already own United’s common stock to purchase additional shares directly from the company. The DRIP also allows participants to automatically reinvest their quarterly dividends in additional shares of common stock without a commission. The DRIP is currently suspended. United’s 401(k) retirement plan regularly purchases shares of United’s common stock directly from United. In addition, United has an Employee Stock Purchase Program (“ESPP”) that allows eligible employees to purchase shares of common stock at a 5% discount, with no commission charges. For the six months ended June 30, 2012 and 2011, United issued 60,982 and 78,584 shares, respectively, and increased capital by $501,000 and $744,000, respectively, through these programs.

United offers its common stock as an investment option in its deferred compensation plan. The common stock component of the deferred compensation plan is accounted for as an equity instrument and is reflected in the consolidated financial statements as common stock issuable. The deferred compensation plan does not allow for diversification once an election is made to invest in United stock and settlement must be accomplished in shares at the time the deferral period is completed. At June 30, 2012 and 2011, 94,657 and 83,575 shares, respectively, were issuable under the deferred compensation plan.

On February 22, 2011, United entered into a Share Exchange Agreement with the Elm Ridge Parties. Under the Share Exchange Agreement, the Elm Ridge Parties agreed to transfer to United 1,551,126 shares of United’s common stock in exchange for 16,613 shares of United’s cumulative perpetual preferred stock, Series D, and warrants to purchase 1,551,126 common shares with an exercise price of $12.50 per share that expires on August 22, 2013. This exchange transaction did not result in a net increase or decrease to total shareholder’s equity for the year ended December 31, 2011.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Note 12 – Assets and Liabilities Measured at Fair Value

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The table below presents United’s assets and liabilities measured at fair value on a recurring basis as of June 30, 2012, December 31, 2011 and June 30, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

 

      Level 1      Level 2      Level 3      Total  

June 30, 2012

           

Assets

           

Securities available for sale:

           

U.S. Government agencies

   $ —         $ 43,874       $ —         $ 43,874   

State and political subdivisions

     —           27,159         —           27,159   

Mortgage-backed securities

     —           1,433,431         —           1,433,431   

Corporate bonds

     —           109,688         350         110,038   

Asset-backed securities

     —           84,498         —           84,498   

Other

     —           2,583         —           2,583   

Deferred compensation plan assets

     2,895         —           —           2,895   

Derivative financial instruments

     —           223         —           223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,895       $ 1,701,456       $ 350       $ 1,704,701   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation plan liability

   $ 2,895       $ —         $ —         $ 2,895   

Brokered certificates of deposit

     —           102,879         —           102,879   

Derivative financial instruments

     —           6,142         —           6,142   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,895       $ 109,021       $ —         $ 111,916   
  

 

 

    

 

 

    

 

 

    

 

 

 
      Level 1      Level 2      Level 3      Total  

December 31, 2011

           

Assets

           

Securities available for sale:

           

U.S. Government agencies

   $ —         $ 43,750       $ —         $ 43,750   

State and political subdivisions

     —           26,339         —           26,339   

Mortgage-backed securities

     —           1,609,909         —           1,609,909   

Corporate bonds

     —           107,328         350         107,678   

Other

     —           2,371         —           2,371   

Deferred compensation plan assets

     2,859         —           —           2,859   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,859       $ 1,789,697       $ 350       $ 1,792,906   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation plan liability

   $ 2,859       $ —         $ —         $ 2,859   

Brokered certificates of deposit

     —           13,107         —           13,107   

Derivative financial instruments

     —           422         —           422   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 2,859       $ 13,529       $ —         $ 16,388   
  

 

 

    

 

 

    

 

 

    

 

 

 
      Level 1      Level 2      Level 3      Total  

June 30, 2011

           

Assets

           

Securities available for sale:

           

U.S. Government agencies

   $ —         $ 77,477       $ —         $ 77,477   

State and political subdivisions

     —           26,772         —           26,772   

Mortgage-backed securities

     —           1,588,489         4,129         1,592,618   

Corporate bonds

     —           116,944         350         117,294   

Other

     —           2,452         —           2,452   

Deferred compensation plan assets

     3,025         —           —           3,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 3,025       $ 1,812,134       $ 4,479       $ 1,819,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

           

Deferred compensation plan liability

   $ 3,025       $ —         $ —         $ 3,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

   $ 3,025       $ —         $ —         $ 3,025   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

The following table shows a reconciliation of the beginning and ending balances for assets measured at fair value on a recurring basis using significant unobservable inputs that are classified as Level 3 values (in thousands).

 

     Securities Available for Sale     Securities Available for Sale  
     Three Months Ended     Six Months Ended  
     June 30,     June 30,  
     2012      2011     2012      2011  

Balance at beginning of period

   $ 350       $ 4,784      $ 350       $ 5,284   

Amounts included in earnings

     —           (5     —           (13

Paydowns

     —           (300     —           (792
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance at end of period

   $ 350       $ 4,479      $ 350       $ 4,479   
  

 

 

    

 

 

   

 

 

    

 

 

 

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

United may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. The table below presents United’s assets and liabilities measured at fair value on a nonrecurring basis as of June 30, 2012, December 31, 2011 and June 30, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall (in thousands).

 

      Level 1      Level 2      Level 3      Total  

June 30, 2012

           

Assets

           

Loans

   $ —         $ —         $ 160,266       $ 160,266   

Foreclosed properties

     —           —           25,253         25,253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 185,519       $ 185,519   
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011

           

Assets

           

Loans

   $ —         $ —         $ 133,828       $ 133,828   

Foreclosed properties

     —           —           29,102         29,102   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 162,930       $ 162,930   
  

 

 

    

 

 

    

 

 

    

 

 

 

June 30, 2011

           

Assets

           

Loans

   $ —         $ —         $ 27,810       $ 27,810   

Foreclosed properties

     —           —           41,922         41,922   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 69,732       $ 69,732   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets and Liabilities Not Measured at Fair Value

For financial instruments that have quoted market prices, those quotes are used to determine fair value. Financial instruments that have no defined maturity, have a remaining maturity of 180 days or less, or reprice frequently to a market rate, are assumed to have a fair value that approximates reported book value, after taking into consideration any applicable credit risk. If no market quotes are available, financial instruments are valued by discounting the expected cash flows using an estimated current market interest rate for the financial instrument. For off-balance sheet derivative instruments, fair value is estimated as the amount that United would receive or pay to terminate the contracts at the reporting date, taking into account the current unrealized gains or losses on open contracts.

The short maturity of United’s assets and liabilities results in having a significant number of financial instruments whose fair value equals or closely approximates carrying value. Such financial instruments are reported in the following balance sheet captions: cash and cash equivalents, mortgage loans held for sale, federal funds purchased, repurchase agreements and other short-term borrowings. The fair value of securities available for sale equals the balance sheet value.

 

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UNITED COMMUNITY BANKS, INC. AND SUBSDIARIES

Notes to Consolidated Financial Statements

 

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect the premium or discount on any particular financial instrument that could result from the sale of United’s entire holdings. Because no ready market exists for a significant portion of United’s financial instruments, fair value estimates are based on many judgments. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

Fair value estimates are based on existing on and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. Significant assets and liabilities that are not considered financial instruments include the mortgage banking operation, brokerage network, deferred income taxes, premises and equipment and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have significant effect on fair value estimates and have not been considered in the estimates.

Off-balance sheet instruments (commitments to extend credit and standby letters of credit) are generally short-term and at variable rates. Therefore, both the carrying amount and the estimated fair value associated with these instruments are immaterial.

The carrying amount and fair values for other financial instruments that are not measured at fair value on a recurring basis in United’s balance sheet at June 30, 2012, December 31, 2011, and June 30, 2011 are as follows (in thousands).

 

     June 30, 2012  
     Carrying      Fair Value Level  
     Amount      Level 1      Level 2      Level 3      Total  

Assets:

              

Securities held to maturity

   $ 282,750       $ —         $ 299,971       $ —         $ 299,971   

Loans, net

     4,006,530         —           —           3,830,187         3,830,187   

Liabilities:

              

Deposits

     5,822,467         —           5,863,885         —           5,863,885   

Federal Home Loan Bank advances

     125,125         —           125,125         —           125,125   

Long-term debt

     120,265         —           —           114,679         114,679   

 

     December 31, 2011      June 30, 2011  
     Carrying             Carrying         
     Amount      Fair Value      Amount      Fair Value  

Assets:

           

Securities held to maturity

   $ 330,203       $ 343,531       $ 371,578       $ 379,231   

Loans, net

     3,995,146         3,800,343         4,035,809         3,889,669   

Liabilities:

           

Deposits

     6,097,983         6,093,772         6,183,215         6,174,117   

Federal Home Loan Bank advances

     40,625         43,236         40,625         43,763   

Long-term debt

     120,225         115,327         150,186         140,771   

Note 13 – Reclassification and Reverse Stock Split

Certain 2011 amounts have been reclassified to conform to the 2012 presentation. On June 17, 2011, United completed a 1-for-5 reverse stock split, or recombination, whereby each five shares of United’s common stock was reclassified into one share of common stock and each five shares of United’s non-voting common stock was reclassified into one share of non-voting common stock. All share and per share amounts for all periods presented have been adjusted to reflect the reverse split as though it had occurred prior to the earliest period presented.

Note 14 – Bulk Loan Sale

On April 18, 2011, United completed the bulk sale of $80.6 million of loans that were reported as held for sale at March 31, 2011. The proceeds from the bulk sale were $87.9 million which resulted in a reduction of charge-offs in the second quarter of 2011.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-looking Statements

This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”), about United and its subsidiaries. These forward-looking statements are intended to be covered by the safe harbor for forward-looking statements provided by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not statements of historical fact, and can be identified by the use of forward-looking terminology such as “believes”, “expects”, “may”, “will”, “could”, “should”, “projects”, “plans”, “goal”, “targets”, “potential”, “estimates”, “pro forma”, “seeks”, “intends”, or “anticipates” or the negative thereof or comparable terminology. Forward-looking statements include discussions of strategy, financial projections, guidance and estimates (including their underlying assumptions), statements regarding plans, objectives, expectations or consequences of various transactions, and statements about the future performance, operations, products and services of United and its subsidiaries. We caution our shareholders and other readers not to place undue reliance on such statements.

Our businesses and operations are and will be subject to a variety of risks, uncertainties and other factors. Consequently, actual results and experiences may differ materially from those contained in any forward-looking statements. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2011, as well as the following factors:

 

 

our ability to maintain profitability;

 

 

our ability to fully realize our deferred tax asset balances, including net operating loss carry-forwards;

 

 

the condition of the banking system and financial markets;

 

 

the results of our most recent internal credit stress test may not accurately predict the impact on our financial condition if the economy were to continue to deteriorate;

 

 

our ability to raise capital as may be necessary;

 

 

our ability to maintain liquidity or access other sources of funding;

 

 

changes in the cost and availability of funding;

 

 

the success of the local economies in which we operate;

 

 

our concentrations of residential and commercial construction and development loans and commercial real estate loans are subject to unique risks that could adversely affect our earnings;

 

 

changes in prevailing interest rates may negatively affect our net income and the value of our assets;

 

 

the accounting and reporting policies of United;

 

 

if our allowance for loan losses is not sufficient to cover actual loan losses;

 

 

we may be subject to losses due to fraudulent and negligent conduct of our loan customers, third party service providers or employees;

 

 

competition from financial institutions and other financial service providers;

 

 

the U.S. Treasury may change the terms of our fixed rate cumulative perpetual preferred stock, Series B (the “Series B preferred stock”);

 

 

risks with respect to future expansion and acquisitions;

 

 

if the conditions in the stock market, the public debt market and other capital markets deteriorate;

 

 

the impact of the Dodd-Frank Wall Street Reform Act of 2010 and related regulations and other changes in financial services laws and regulations;

 

 

the failure of other financial institutions;

 

 

a special assessment that may be imposed by the Federal Deposit Insurance Corporation (the “FDIC”) on all FDIC-insured institutions in the future, similar to the assessment in 2009 that decreased our earnings;

 

 

the formal investigation by the Securities and Exchange Commission or any penalty, sanction or further restatement of our previously issued financial statements that may result from such investigation;

 

 

the costs and effects of litigation, examinations, investigations, or similar matters, or adverse facts and developments related thereto, including possible dilution;

 

 

regulatory or judicial proceedings, board resolutions, informal memorandums of understanding or formal enforcement actions imposed by regulators that may occur, or any such proceedings or enforcement actions that is more severe than we anticipate.

Additional information with respect to factors that may cause actual results to differ materially from those contemplated by such forward-looking statements may also be included in other reports that United files with the Securities and Exchange Commission. United cautions that the foregoing list of factors is not exclusive and not to place undue reliance on forward-looking statements. United does not intend to update any forward-looking statement, whether written or oral, relating to the matters discussed in this Form 10-Q.

 

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Overview

The following discussion is intended to provide insight into the results of operations and financial condition of United Community Banks, Inc. (“United”) and its subsidiaries and should be read in conjunction with the consolidated financial statements and accompanying notes.

United is a bank holding company registered with the Board of Governors of the Federal Reserve under the Bank Holding Company Act of 1956 that was incorporated under the laws of the state of Georgia in 1987 and commenced operations in 1988. At June 30, 2012 United had total consolidated assets of $6.74 billion, total loans of $4.12 billion, excluding the loans acquired from Southern Community Bank (“SCB”) that are covered by loss sharing agreements and therefore have a different risk profile. United also had total deposits of $5.82 billion and shareholders’ equity of $576 million.

United’s activities are primarily conducted by its wholly owned Georgia banking subsidiary, United Community Bank (the “Bank”). The Bank’s operations are conducted under a community bank model that operates 27 “community banks” with local bank presidents and boards in north Georgia, the Atlanta, Georgia metropolitan statistical area (the “Atlanta MSA”), the Gainesville, Georgia metropolitan statistical area (the “Gainesville MSA”), coastal Georgia, western North Carolina, and east Tennessee.

Included in management’s discussion and analysis are certain non-GAAP (accounting principles generally accepted in the United States of America (“GAAP”)) performance measures. United’s management believes that non-GAAP performance measures are useful in analyzing United’s financial performance trends and therefore this section will refer to non-GAAP performance measures. A reconciliation of these non-GAAP performance measures to GAAP performance measures is included in the table on page 33.

United reported a net income of $6.50 million for the second quarter of 2012. This compared to net income of $12.0 million for the second quarter of 2011. Diluted earnings per common share was $.06 for the second quarter of 2012, compared to diluted earnings per common share of $.16 for the second quarter of 2011.

For the six months ended June 30, 2012, United reported net income of $18.0 million. This compared to a net loss of $225 million for the first six months of 2011, which reflects the credit losses taken in the first quarter associated with United’s problem asset disposition plan (the “Problem Asset Disposition Plan”). United’s Board of Directors adopted the Problem Asset Disposition Plan in the first quarter of 2011 following a private placement transaction that raised $380 million in new capital (the “Private Placement”). Diluted earnings per common share was $.21 for the six months ended June 30, 2012, compared with a loss per common share of $10.52 for the same period in 2011.

United’s provision for loan losses was $18.0 million for the three months ended June 30, 2012, compared to $11.0 million for the same period in 2011. Net charge-offs for the second quarter of 2012 were $18.9 million, compared to $16.5 million for the second quarter of 2011. For the six months ended June 30, 2012, United’s provision for loan losses was $33.0 million, compared to $201 million for the same period of 2011. Net charge-offs for the first six months of 2012 were $34.8 million, compared to $248 million for the first six months of 2011. During the first quarter of 2011, performing substandard loans with a pre-charge down carrying amount of $166 million and nonperforming loans with a pre-charge down carrying amount of $101 million were collectively written down to the expected sales proceeds of $80.6 million, in conjunction with a bulk loan sale that was part of the Problem Asset Disposition Plan (the “Bulk Loan Sale”). United recognized net charge-offs of $186 million related to the transfer of loans to the held for sale classification in the first quarter. The Bulk Loan Sale was completed on April 18, 2011. Proceeds from the sale were greater than originally estimated, resulting in a reduction of second quarter charge-offs of $7.27 million.

As of June 30, 2012, United’s allowance for loan losses was $113 million, or 2.74% of loans, compared to $128 million, or 3.07% of loans, at June 30, 2011. Nonperforming assets of $146 million, which excludes assets of Southern Community Bank (“SCB”) that are covered by loss sharing agreements with the FDIC, increased to 2.16% of total assets at June 30, 2012 from 1.66% as of June 30, 2011. Nonperforming asset levels are impacted significantly by the inflow of new nonperforming loans and United’s ability to liquidate foreclosed properties. During the third quarter of 2011, United classified its largest lending relationship of $76.6 million, which caused nonperforming assets to increase from 1.66% of total assets at June 30, 2011. Since that time, nonperforming assets have trended down.

Taxable equivalent net interest revenue was $56.8 million for the second quarter of 2012, compared to $58.9 million for the same period of 2011. The decrease in net interest revenue was primarily the result of the lower yield on the securities portfolio, which was significantly impacted by heavy prepayment activity in the mortgage market. Prepayment activity suppressed the securities portfolio yield by accelerating the amortization of bond purchase premiums and the yields at which the proceeds were reinvested fell short of the yields of the bonds they replaced. Average loans for the quarter declined $110 million from the second quarter of 2011. The impact of the decrease in average loan balances was substantially offset by lower deposit rates. Net interest margin increased from 3.41% for the three months ended June 30, 2011 to 3.43% for the same period in 2012. For the six months ended June 30, 2012, taxable equivalent net interest revenue was $116 million, compared to $115 million for the same period of 2011. Net interest margin increased from 3.36% for the six months ended June 30, 2011 to 3.48% for the same period in 2012. Over the past year, United has maintained above normal levels of liquidity.

 

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Table of Contents

Operating fee revenue decreased $1.04 million, or 7%, from the second quarter of 2011 and increased $2.50 million, or 10%, from the first six months of 2011. The quarterly decrease was due to a decline in hedge ineffectiveness gains. The second quarter of 2011 included $2.8 million in hedge ineffectiveness gains. In contrast, the second quarter of 2012 included $180,000 in hedge ineffectiveness losses. The year to date increase in operating fee revenue was due to an 81% increase in mortgage loan and related fees as well as a 9% increase in service charges and fees. The increase in service charges and fees is due to new service fees on demand deposit accounts that became effective January 1, 2012. These increases, along with a $2.86 million increase in other fee revenue that resulted mostly from $1.1 million in interest on a prior year Federal tax refund and $728,000 in gains from the sale of state low income housing tax credits that were included in the first quarter of 2012, more than offset the decline in hedge ineffectiveness gains for the period.

For the second quarter of 2012, operating expenses of $44.3 million were down $4.42 million from the second quarter of 2011. Lower salary and employee benefits accounted for $2.14 million of the decrease and lower FDIC assessments and other regulatory charges accounted for $1.10 million of the decrease. For the six months ended June 30, 2012, operating expenses of $91.3 million were down $72.7 million from the same period of 2011. Foreclosed property costs were down $61.1 million from the first six months of 2011, due to the writedowns taken in 2011 associated with the Problem Asset Disposition Plan.

Recent Developments

In the first quarter of 2012, following detailed discussions with the Division of Corporation Finance and the Office of the Chief Accountant of the Securities and Exchange Commission (the “SEC”), United recorded an additional income tax expense of $156.7 million and a charge to other comprehensive income in shareholders’ equity of $10.2 million to establish a full deferred tax asset valuation allowance as of December 31, 2010. Based on these discussions with the SEC, United believes that establishing the full valuation allowance was responsive to the previously disclosed comments made by the SEC regarding United’s net deferred tax assets. As a result of increasing the valuation allowance for its deferred tax assets as of December 31, 2010, United restated its financial statements for the fourth quarter and year ended December 31, 2010 and the first three quarters of 2011, and revised the disclosures contained in its periodic reports filed with the SEC for those periods.

As previously disclosed on United’s Current Report on Form 8-K filed on May 16, 2012, United received from the SEC’s Division of Enforcement a notice of formal investigation that included a subpoena seeking information relating primarily to United’s deferred tax asset valuation allowances, the establishment of which resulted in the restatements described above, and United’s 2009 and 2010 goodwill impairment charges. The notice of investigation stated that it should not be construed as an indication that any violations of law have occurred. United is cooperating fully with the SEC in response to the subpoena.

As previously disclosed on United’s Current Report on Form 8-K filed on July 6, 2012, United has been served with a lawsuit filed by FILB Co-Investments LLC (“FILB”) against United in New York federal court. The lawsuit relates to purported contractual rights that FILB claims were assigned to it by Fletcher International, Ltd (“Fletcher”). United believes the lawsuit is meritless for several reasons, and will defend it aggressively.

The purported assignment to FILB from Fletcher relates to a dispute between those two entities emanating from a redemption request to Fletcher by several investors in one of Fletcher’s funds. That dispute involves judicial proceedings in the Cayman Islands that resulted in the Grand Court of the Cayman Islands ordering the liquidation of a Fletcher fund, with FILB now being managed by a court-appointed liquidator. Fletcher has now filed for bankruptcy protection and is seeking to prevent the liquidation from continuing. United believes that FILB has filed this lawsuit in an attempt to preserve all possible rights, regardless of merit, that might be pursued as a result of the liquidation.

FILB alleges that, among other things, United breached its obligation to deliver 76 shares of preferred stock of United to FILB and that the investment period with respect to FILB’s purportedly assigned right to purchase United’s preferred stock is continuing. FILB also claimed that United’s 2011 reclassification of its common stock in the form of a 1-for-5 reverse stock split, or recombination, should be ignored for purposes of calculating the number of shares of United’s common stock issuable upon the redemption of United’s preferred stock.

United strongly disagrees with each of these claims and fully expects its position to prevail if the litigation proceeds.

Critical Accounting Policies

The accounting and reporting policies of United are in accordance with GAAP and conform to general practices within the banking industry. The more critical accounting and reporting policies include United’s accounting for the allowance for loan losses, fair value measurements, and income taxes. In particular, United’s accounting policies related to allowance for loan losses, fair value measurements and income taxes involve the use of estimates and require significant judgment to be made by management. Different assumptions in the application of these policies could result in material changes in United’s consolidated financial position or consolidated results of operations. See “Asset Quality and Risk Elements” herein for additional discussion of United’s accounting methodologies related to the allowance for loan losses.

GAAP Reconciliation and Explanation

This Form 10-Q contains non-GAAP financial measures, which are performance measures determined by methods other than in accordance with GAAP. Such non-GAAP financial measures include, among others the following: taxable equivalent interest revenue, taxable equivalent net interest revenue, tangible book value per share, tangible equity to assets, tangible common equity to assets and tangible common equity to risk-weighted assets. Management uses these non-GAAP financial measures because it believes they are useful for evaluating our operations and performance over periods of time, as well as in managing and evaluating our business and in discussions about our operations and performance. Management believes these non-GAAP financial measures provide users of our financial information with a meaningful measure for assessing our financial results and credit trends, as well as comparison to financial results for prior periods. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled financial measures used by other companies. A reconciliation of these operating performance measures to GAAP performance measures is included in on the table on page 33.

 

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Table 1 - Financial Highlights

Selected Financial Information

 

                                  Second                    
    2012     2011     Quarter     For the Six     YTD  
(in thousands, except per share   Second     First     Fourth     Third     Second     2012-2011     Months Ended     2012-2011  

data; taxable equivalent)

  Quarter     Quarter     Quarter     Quarter     Quarter     Change     2012     2011     Change  

INCOME SUMMARY

                 

Interest revenue

  $ 66,780      $ 70,221      $ 71,905      $ 74,543      $ 76,931        $ 137,001      $ 152,896     

Interest expense

    9,944        11,357        12,855        15,262        17,985          21,301        37,558     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Net interest revenue

    56,836        58,864        59,050        59,281        58,946        (4 )%      115,700        115,338        —  

Provision for loan losses

    18,000        15,000        14,000        36,000        11,000          33,000        201,000     

Fee revenue

    12,867        15,379        12,667        11,498        13,905        (7     28,246        25,743        10   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total revenue

    51,703        59,243        57,717        34,779        61,851          110,946        (59,919  

Operating expenses

    44,310        46,955        51,080        46,520        48,728        (9     91,265        163,999        (44
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Income (loss) before income taxes

    7,393        12,288        6,637        (11,741     13,123          19,681        (223,918  

Income tax expense (benefit)

    894        760        (3,264     (402     1,095          1,654        1,390     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Net income (loss)

    6,499        11,528        9,901        (11,339     12,028        (46     18,027        (225,308  

Preferred dividends and discount accretion

    3,032        3,030        3,025        3,019        3,016          6,062        5,794     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Net income (loss) available to common shareholders

  $ 3,467      $ 8,498      $ 6,876      $ (14,358   $ 9,012        (62   $ 11,965      $ (231,102  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

PERFORMANCE MEASURES

                 

Per common share:

                 

Diluted income (loss)

  $ .06      $ .15      $ .12      $ (.25   $ .16        (63   $ .21      $ (10.52  

Book value

    6.61        6.68        6.62        6.77        7.11        (7     6.61        7.11        (7

Tangible book value (2)

    6.48        6.54        6.47        6.61        6.94        (7     6.48        6.94        (7

Key performance ratios:

                 

Return on equity (1)(3)

    3.51     8.78     7.40     (15.06 )%      42.60       6.12     (345.86 )%   

Return on assets (3)

    .37        .66        .56        (.64     .66          .52        (6.16  

Net interest margin (3)

    3.43        3.53        3.51        3.55        3.41          3.48        3.36     

Efficiency ratio

    63.84        63.31        71.23        65.73        66.88          63.56        116.28     

Equity to assets

    8.33        8.19        8.28        8.55        8.06          8.26        7.11     

Tangible equity to assets (2)

    8.24        8.08        8.16        8.42        7.93          8.16        7.00     

Tangible common equity to assets (2)

    5.45        5.33        5.38        5.65        1.37          5.39        2.05     

Tangible common equity to risk- weighted assets (2)

    8.37        8.21        8.25        8.52        8.69          8.37        8.69     

ASSET QUALITY *

                 

Non-performing loans

  $ 115,340      $ 129,704      $ 127,479      $ 144,484      $ 71,065        $ 115,340      $ 71,065     

Foreclosed properties

    30,421        31,887        32,859        44,263        47,584          30,421        47,584     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

Total non-performing assets (NPAs)

    145,761        161,591        160,338        188,747        118,649          145,761        118,649     

Allowance for loan losses

    112,705        113,601        114,468        146,092        127,638          112,705        127,638     

Net charge-offs

    18,896        15,867        45,624        17,546        16,483          34,763        248,057     

Allowance for loan losses to loans

    2.74     2.75     2.79     3.55     3.07       2.74     3.07  

Net charge-offs to average loans (3)

    1.85        1.55        4.39        1.68        1.58          1.70        11.46     

NPAs to loans and foreclosed properties

    3.51        3.88        3.87        4.54        2.82          3.51        2.82     

NPAs to total assets

    2.16        2.25        2.30        2.74        1.66          2.16        1.66     

AVERAGE BALANCES ($ in millions)

                 

Loans

  $ 4,156      $ 4,168      $ 4,175      $ 4,194      $ 4,266        (3   $ 4,162      $ 4,432        (6

Investment securities

    2,145        2,153        2,141        2,150        2,074        3        2,149        1,851        16   

Earning assets

    6,665        6,700        6,688        6,630        6,924        (4     6,682        6,913        (3

Total assets

    6,993        7,045        7,019        7,000        7,363        (5     7,019        7,371        (5

Deposits

    5,853        6,028        6,115        6,061        6,372        (8     5,940        6,465        (8

Shareholders’ equity

    583        577        581        598        594        (2     580        524        11   

Common shares - basic (thousands)

    57,840        57,764        57,646        57,599        25,427          57,803        21,965     

Common shares - diluted (thousands)

    57,840        57,764        57,646        57,599        57,543          57,803        21,965     

AT PERIOD END ($ in millions)

                 

Loans *

  $ 4,119      $ 4,128      $ 4,110      $ 4,110      $ 4,163        (1   $ 4,119      $ 4,163        (1

Investment securities

    1,984        2,202        2,120        2,123        2,188        (9     1,984        2,188        (9

Total assets

    6,737        7,174        6,983        6,894        7,152        (6     6,737        7,152        (6

Deposits

    5,822        6,001        6,098        6,005        6,183        (6     5,822        6,183        (6

Shareholders’ equity

    576        580        575        583        603        (4     576        603        (4

Common shares outstanding (thousands)

    57,641        57,603        57,561        57,510        57,469          57,641        57,469     

 

(1) 

Net loss available to common shareholders, which is net of preferred stock dividends, divided by average realized common equity, which excludes accumulated other comprehensive income (loss).

(2) 

Excludes effect of acquisition related intangibles and associated amortization.

(3) 

Annualized.

* Excludes loans and foreclosed properties covered by loss sharing agreements with the FDIC.

 

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Table of Contents

Table 1 Continued - Non-GAAP Performance Measures Reconciliation

Selected Financial Information

 

     2012     2011     For the Six
Months Ended
 
(in thousands, except per share    Second     First     Fourth     Third     Second    

data; taxable equivalent)

   Quarter     Quarter     Quarter     Quarter     Quarter     2012     2011  

Interest revenue reconciliation

              

Interest revenue - taxable equivalent

   $ 66,780      $ 70,221      $ 71,905      $ 74,543      $ 76,931      $ 137,001      $ 152,896   

Taxable equivalent adjustment

     (444     (446     (423     (420     (429     (890     (864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest revenue (GAAP)

   $ 66,336      $ 69,775      $ 71,482      $ 74,123      $ 76,502      $ 136,111      $ 152,032   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue reconciliation

              

Net interest revenue - taxable equivalent

   $ 56,836      $ 58,864      $ 59,050      $ 59,281      $ 58,946      $ 115,700      $ 115,338   

Taxable equivalent adjustment

     (444     (446     (423     (420     (429     (890     (864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net interest revenue (GAAP)

   $ 56,392      $ 58,418      $ 58,627      $ 58,861      $ 58,517      $ 114,810      $ 114,474   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue reconciliation

              

Total operating revenue

   $ 51,703      $ 59,243      $ 57,717      $ 34,779      $ 61,851      $ 110,946      $ (59,919

Taxable equivalent adjustment

     (444     (446     (423     (420     (429     (890     (864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue (GAAP)

   $ 51,259      $ 58,797      $ 57,294      $ 34,359      $ 61,422      $ 110,056      $ (60,783
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes reconciliation

              

Income (loss) before taxes

   $ 7,393      $ 12,288      $ 6,637      $ (11,741   $ 13,123      $ 19,681      $ (223,918

Taxable equivalent adjustment

     (444     (446     (423     (420     (429     (890     (864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before taxes (GAAP)

   $ 6,949      $ 11,842      $ 6,214      $ (12,161   $ 12,694      $ 18,791      $ (224,782
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense reconciliation

              

Income tax (benefit) expense

   $ 894      $ 760      $ (3,264   $ (402   $ 1,095      $ 1,654      $ 1,390   

Taxable equivalent adjustment

     (444     (446     (423     (420     (429     (890     (864
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax (benefit) expense (GAAP)

   $ 450      $ 314      $ (3,687   $ (822   $ 666      $ 764      $ 526   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Book value per common share reconciliation

              

Tangible book value per common share

   $ 6.48      $ 6.54      $ 6.47      $ 6.61      $ 6.94      $ 6.48      $ 6.94   

Effect of goodwill and other intangibles

     .13        .14        .15        .16        .17        .13        .17   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Book value per common share (GAAP)

   $ 6.61      $ 6.68      $ 6.62      $ 6.77      $ 7.11      $ 6.61      $ 7.11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Average equity to assets reconciliation

              

Tangible common equity to assets

     5.45     5.33     5.38     5.65     1.37     5.39     2.05

Effect of preferred equity

     2.79        2.75        2.78        2.77        6.56        2.77        4.95   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible equity to assets

     8.24        8.08        8.16        8.42        7.93        8.16        7.00   

Effect of goodwill and other intangibles

     .09        .11        .12        .13        .13        .10        .11   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity to assets (GAAP)

     8.33     8.19     8.28     8.55     8.06     8.26     7.11
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tangible common equity to risk-weighted assets reconciliation

              

Tangible common equity to risk-weighted assets

     8.37     8.21     8.25     8.52     8.69     8.37     8.69

Effect of other comprehensive income

     .28        .10        (.03     (.29     (.42     .28        (.42

Effect of trust preferred

     1.19        1.15        1.18        1.19        1.15        1.19        1.15   

Effect of preferred equity

     4.35        4.23        4.29        4.33        4.20        4.35        4.20   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Tier I capital ratio (Regulatory)

     14.19     13.69     13.69     13.75     13.62     14.19     13.62
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Results of Operations

United reported net income of $6.50 million for the second quarter of 2012. This compared to net income of $12.0 million for the same period in 2011. For the second quarter of 2012, diluted earnings per common share was $.06. This compared to diluted earnings per common share of $.16 for the second quarter of 2011. For the six months ended June 30, 2012, United reported net income of $18.0 million compared to a net operating loss of $225 million for the same period in 2011. The loss for the six months ended June 30, 2011 reflects the Board of Directors’ decision in the first quarter of 2011 to adopt the Problem Asset Disposition Plan to quickly dispose of problem assets following United’s private placement at the end of the first quarter. Diluted earnings per common share was $.21 for the six months ended June 30, 2012, compared with a diluted loss per common share of $10.52 for the same period in 2011.

 

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Table of Contents

Net Interest Revenue (Taxable Equivalent)

Net interest revenue (the difference between the interest earned on assets and the interest paid on deposits and borrowed funds) is the single largest component of total revenue. United actively manages this revenue source to provide optimal levels of revenue while balancing interest rate, credit and liquidity risks. Taxable equivalent net interest revenue for the three months ended June 30, 2012 was $56.8 million, down $2.11 million, or 4%, from the second quarter of 2011. The decrease in net interest revenue for the second quarter of 2012 compared to the second quarter of 2011 was mostly due to lower yields on the securities and loan portfolios and a smaller balance of interest-earning assets. United continues its intense focus on loan and deposit pricing in an effort to maintain a steady level of net interest revenue.

Average loans decreased $110 million, or 3%, from the second quarter of last year. The decrease in the loan portfolio has begun to stabilize, however there is a high level of competition for quality lending relationships, which continues to put pressure on pricing. While loan balances have declined, United continues to make new loans. During the second quarter of 2012, United funded $86.5 million in new loans, primarily commercial and small business loans in north Georgia, the Atlanta MSA, east Tennessee and coastal Georgia.

Average interest-earning assets for the second quarter of 2012 decreased $259 million, or 4%, from the same period in 2011. Average loans decreased $110 million from the second quarter of 2011 however, this decrease was offset by a $71.6 million increase in average investment securities. The increase in the securities portfolio was due to purchases of floating rate mortgage-backed securities in an effort to temporarily invest excess liquidity, including the proceeds from the new capital raised at the end of the first quarter of 2011. The average yield on interest earning assets for the three months ended June 30, 2012, was 4.03%, down 42 basis points from 4.45% for the same period of 2011. The most significant factors in the lower earning asset yield were the lower average yields on the loan and securities portfolios. For the second quarter of 2012, the yield on total securities decreased 79 basis points from the same period a year ago. The securities portfolio was significantly impacted by heavy prepayment activity in the mortgage market during 2012. Prepayment activity suppressed the securities portfolio yield by accelerating the amortization of bond purchase premiums and the yields at which the proceeds were reinvested fell short of the yields of the bonds they replaced. Partially offsetting the lower loan and securities yields was a higher average yield on other interest-earnings assets due to the use of reverse repurchase agreements including collateral swap transactions where United enters into a repurchase agreement and reverse repurchase agreement simultaneously with the same counterparty subject to a master netting agreement.

Average interest-bearing liabilities decreased $558 million, or 10%, from the second quarter of 2011 due to the rolling off of higher-cost brokered deposits and certificates of deposit as funding needs decreased. The average cost of interest-bearing liabilities for the second quarter of 2012 was .76% compared to 1.24% for the same period of 2011, reflecting United’s ability to reduce deposit pricing. Also contributing to the overall lower rate on interest-bearing liabilities was a shift in the mix of deposits away from more expensive time deposits toward lower-rate transaction deposits.

The banking industry uses two ratios to measure relative profitability of net interest revenue. The net interest spread measures the difference between the average yield on interest-earning assets and the average rate paid on interest-bearing liabilities. The interest rate spread eliminates the effect of non-interest-bearing deposits and gives a direct perspective on the effect of market interest rate movements. The net interest margin is an indication of the profitability of a company’s investments, and is defined as net interest revenue as a percent of average total interest-earning assets, which includes the positive effect of funding a portion of interest-earning assets with customers’ non-interest bearing deposits and stockholders’ equity.

For the three months ended June 30, 2012 and 2011, the net interest spread was 3.27% and 3.21%, respectively, while the net interest margin was 3.43% and 3.41%, respectively.

For the first six months of 2012, net interest revenue was $116 million, an increase of $362,000, or less than 1%, from the first six months of 2011. Average earning assets decreased $231 million, or 3%, during the first six months of 2012 compared to the same period a year earlier. The yield on earning assets decreased 33 basis points from 4.45% for the six months ended June 30, 2011 to 4.12% for the six months ended June 30, 2012 due to declining average loan balances and a declining average loan yield and the abnormally high prepayment activity on mortgage-backed securities in the securities portfolio during 2012. The cost of interest bearing liabilities over the same period decreased 47 basis points. The combined effect of the lower yield on interest-earning assets, which was more than offset by the lower cost of interest-bearing liabilities resulted in the net interest margin increasing 12 basis points from the six months ended June 30, 2011 to the six months ended June 30, 2012.

 

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The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the three months ended June 30, 2012 and 2011.

Table 2 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Three Months Ended June 30,

 

     2012     2011  
     Average            Avg.     Average            Avg.  

(dollars in thousands, taxable equivalent)

   Balance     Interest      Rate     Balance     Interest      Rate  

Assets:

              

Interest-earning assets:

              

Loans, net of unearned income (1)(2)

   $ 4,155,619      $ 54,296         5.25   $ 4,266,211      $ 60,958         5.73

Taxable securities (3)

     2,121,053        10,800         2.04        2,048,683        14,541         2.84   

Tax-exempt securities (1)(3)

     24,242        429         7.08        25,044        411         6.56   

Federal funds sold and other interest-earning assets

     364,099        1,255         1.38        583,832        1,021         .70   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     6,665,013        66,780         4.03        6,923,770        76,931         4.45   
  

 

 

   

 

 

      

 

 

   

 

 

    

Non-interest-earning assets:

              

Allowance for loan losses

     (115,955          (139,744     

Cash and due from banks

     51,907             119,801        

Premises and equipment

     173,792             178,949        

Other assets (3)

     218,347             280,204        
  

 

 

        

 

 

      

Total assets

   $ 6,993,104           $ 7,362,980        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity:

              

Interest-bearing liabilities:

              

Interest-bearing deposits:

              

NOW

   $ 1,279,686        503         .16      $ 1,310,441        1,036         .32   

Money market

     1,132,548        661         .23        979,432        1,499         .61   

Savings

     216,175        38         .07        195,946        64         .13   

Time less than $100,000

     1,183,845        2,520         .86        1,541,909        4,990         1.30   

Time greater than $100,000

     778,477        2,063         1.07        988,810        3,873         1.57   

Brokered time deposits

     150,449        490         1.31        473,161        2,132         1.81   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     4,741,180        6,275         .53        5,489,699        13,594         .99   
  

 

 

   

 

 

      

 

 

   

 

 

    

Federal funds purchased and other borrowings

     97,134        904         3.74        103,156        1,074         4.18   

Federal Home Loan Bank advances

     278,971        390         .56        52,735        570         4.34   

Long-term debt

     120,256        2,375         7.94        150,178        2,747         7.34   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total borrowed funds

     496,361        3,669         2.97        306,069        4,391         5.75   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     5,237,541        9,944         .76        5,795,768        17,985         1.24   
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     1,112,128             882,151        

Other liabilities

     60,726             91,353        
  

 

 

        

 

 

      

Total liabilities

     6,410,395             6,769,272        

Shareholders’ equity

     582,709             593,708        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 6,993,104           $ 7,362,980        
  

 

 

        

 

 

      

Net interest revenue

     $ 56,836           $ 58,946      
    

 

 

        

 

 

    

Net interest-rate spread

          3.27          3.21
       

 

 

        

 

 

 

Net interest margin (4)

          3.43          3.41
       

 

 

        

 

 

 

 

(1) 

Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.

(2) 

Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.

(3) 

Securities available for sale are shown at amortized cost. Pretax unrealized gains of $25.7 million in 2012 and $32.2 million in 2011 are included in other assets for purposes of this presentation.

(4) 

Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

 

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The following table shows the relationship between interest revenue and expense, and the average amounts of interest-earning assets and interest-bearing liabilities for the six months ended June 30, 2012 and 2011.

Table 3 - Average Consolidated Balance Sheets and Net Interest Analysis

For the Six Months Ended June 30,

 

     2012     2011  

(dollars in thousands, taxable equivalent)

   Average
Balance
    Interest      Avg.
Rate
    Average
Balance
    Interest      Avg.
Rate
 

Assets:

              

Interest-earning assets:

              

Loans, net of unearned income (1)(2)

   $ 4,162,030      $ 110,138         5.32   $ 4,431,617      $ 122,028         5.55

Taxable securities (3)

     2,124,422        23,554         2.22        1,825,322        27,886         3.06   

Tax-exempt securities (1)(3)

     24,840        839         6.76        25,434        835         6.57   

Federal funds sold and other interest-earning assets

     371,044        2,470         1.33        630,384        2,147         .68   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-earning assets

     6,682,336        137,001         4.12        6,912,757        152,896         4.45   
  

 

 

   

 

 

      

 

 

   

 

 

    

Non-interest-earning assets:

              

Allowance for loan losses

     (116,879          (154,347     

Cash and due from banks

     53,286             127,031        

Premises and equipment

     174,321             179,150        

Other assets (3)

     226,013             306,495        
  

 

 

        

 

 

      

Total assets

   $ 7,019,077           $ 7,371,086        
  

 

 

        

 

 

      

Liabilities and Shareholders’ Equity:

              

Interest-bearing liabilities:

              

Interest-bearing deposits:

              

NOW

   $ 1,368,900        1,140         .17      $ 1,341,618        2,360         .35   

Money market

     1,101,103        1,302         .24        954,128        3,527         .75   

Savings

     210,789        75         .07        191,708        141         .15   

Time less than $100,000

     1,227,599        5,546         .91        1,541,130        10,441         1.37   

Time greater than $100,000

     799,821        4,478         1.13        989,840        8,024         1.63   

Brokered time deposits

     155,892        1,208         1.56        585,103        4,262         1.47   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing deposits

     4,864,104        13,749         .57        5,603,527        28,755         1.03   
  

 

 

   

 

 

      

 

 

   

 

 

    

Federal funds purchased and other borrowings

     99,696        1,949         3.93        102,132        2,116         4.18   

Federal Home Loan Bank advances

     208,672        856         .82        53,923        1,160         4.34   

Long-term debt

     120,246        4,747         7.94        150,169        5,527         7.42   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total borrowed funds

     428,614        7,552         3.54        306,224        8,803         5.80   
  

 

 

   

 

 

      

 

 

   

 

 

    

Total interest-bearing liabilities

     5,292,718        21,301         .81        5,909,751        37,558         1.28   
    

 

 

        

 

 

    

Non-interest-bearing liabilities:

              

Non-interest-bearing deposits

     1,076,358             861,864        

Other liabilities

     70,330             75,083        
  

 

 

        

 

 

      

Total liabilities

     6,439,406             6,846,698        

Shareholders’ equity

     579,671             524,388        
  

 

 

        

 

 

      

Total liabilities and shareholders’ equity

   $ 7,019,077           $ 7,371,086        
  

 

 

        

 

 

      

Net interest revenue

     $ 115,700           $ 115,338      
    

 

 

        

 

 

    

Net interest-rate spread

          3.31          3.17
       

 

 

        

 

 

 

Net interest margin (4)

          3.48          3.36
       

 

 

        

 

 

 

 

(1) 

Interest revenue on tax-exempt securities and loans has been increased to reflect comparable interest on taxable securities and loans. The rate used was 39%, reflecting the statutory federal income tax rate and the federal tax adjusted state income tax rate.

(2) 

Included in the average balance of loans outstanding are loans where the accrual of interest has been discontinued and loans that are held for sale.

(3) 

Securities available for sale are shown at amortized cost. Pretax unrealized gains of $24.7 million in 2012 and $29.7 million in 2011 are included in other assets for purposes of this presentation.

(4) 

Net interest margin is taxable equivalent net-interest revenue divided by average interest-earning assets.

 

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Table of Contents

The following table shows the relative effect on net interest revenue for changes in the average outstanding amounts (volume) of interest-earning assets and interest-bearing liabilities and the rates earned and paid on such assets and liabilities (rate). Variances resulting from a combination of changes in rate and volume are allocated in proportion to the absolute dollar amounts of the change in each category.

Table 4—Change in Interest Revenue and Expense on a Taxable Equivalent Basis

(in thousands)

 

     Three Months Ended June 30, 2012     Six Months Ended June 30, 2012  
     Compared to 2011     Compared to 2011  
     Increase (decrease)     Increase (decrease)  
     Due to Changes in     Due to Changes in  
     Volume     Rate     Total     Volume     Rate     Total  

Interest-earning assets:

            

Loans

   $ (1,549   $ (5,113   $ (6,662   $ (7,247   $ (4,643   $ (11,890

Taxable securities

     498        (4,239     (3,741     4,101        (8,433     (4,332

Tax-exempt securities

     (13     31        18        (20     24        4   

Federal funds sold and other interest-earning assets

     (488     722        234        (1,137     1,460        323   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-earning assets

     (1,552     (8,599     (10,151     (4,303     (11,592     (15,895
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest-bearing liabilities:

            

NOW accounts

     (23     (510     (533     47        (1,267     (1,220

Money market accounts

     205        (1,043     (838     475        (2,700     (2,225

Savings deposits

     6        (32     (26     13        (79     (66

Time deposits less than $100,000

     (999     (1,471     (2,470     (1,856     (3,039     (4,895

Time deposits greater than $100,000

     (718     (1,092     (1,810     (1,358     (2,188     (3,546

Brokered deposits

     (1,167     (475     (1,642     (3,310     256        (3,054
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing deposits

     (2,696     (4,623     (7,319     (5,989     (9,017     (15,006
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Federal funds purchased & other borrowings

     (61     (109     (170     (50     (117     (167

Federal Home Loan Bank advances

     675        (855     (180     1,227        (1,531     (304

Long-term debt

     (578     206        (372     (1,160     380        (780
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total borrowed funds

     36        (758     (722     17        (1,268     (1,251
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest-bearing liabilities

     (2,660     (5,381     (8,041     (5,972     (10,285     (16,257
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Increase (decrease) in net interest revenue

   $ 1,108      $ (3,218   $ (2,110   $ 1,669      $ (1,307   $ 362   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for Loan Losses

The provision for loan losses is based on management’s evaluation of losses inherent in the loan portfolio and corresponding analysis of the allowance for loan losses at quarter-end. The provision for loan losses was $18.0 million and $33 million for the second quarter and the first six months of 2012, respectively, compared to $11.0 million and $201 million for the same periods in 2011. The amount of provision recorded in each period was the amount required such that the total allowance for loan losses reflected the appropriate balance, in the estimation of management, and was sufficient to cover inherent losses in the loan portfolio. For the three and six months ended June 30, 2012, net loan charge-offs as an annualized percentage of average outstanding loans were 1.85% and 1.70%, compared to 1.58% and 11.46%, respectively, for the same periods in 2011.

As the residential construction and housing markets have struggled, it has been difficult for many builders and developers to produce cash flow needed to service debt from selling lots and houses. This deterioration of the residential construction and housing market was the primary factor that resulted in higher credit losses and increases in non-performing assets over the last four years. Although a majority of the charge-offs have been within the residential construction and development portion of the portfolio, credit quality deterioration migrated to other loan categories as pressure resulting from economic conditions has persisted and unemployment levels have remained high throughout United’s markets. Additional discussion on credit quality and the allowance for loan losses is included in the Asset Quality and Risk Elements section of this report on page 42.

 

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Table of Contents

Fee Revenue

Operating fee revenue for the three and six months ended June 30, 2012 was $12.9 million and $28.2 million, respectively, a decrease of $1.04 million, or 7%, compared to second quarter of 2011, and an increase of $2.50 million, or 10%, from the year-to-date period of 2011. The following table presents the components of fee revenue for the second quarters and first six months of 2012 and 2011.

Table 5—Fee Revenue

(in thousands)

 

     Three Months Ended                 Six Months Ended              
     June 30,     Change     June 30,     Change  
     2012     2011     Amount     Percent     2012     2011     Amount     Percent  

Overdraft fees

   $ 3,232      $ 3,657      $ (425     (12   $ 6,477      $ 7,168      $ (691     (10

Debit card fees

     3,242        3,279        (37     (1     6,344        5,809        535        9   

Other service charges and fees

     1,342        672        670        100        2,778        1,351        1,427        106   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Service charges and fees

     7,816        7,608        208        3        15,599        14,328        1,271        9   

Mortgage loan and related fees

     2,322        952        1,370        144        4,421        2,446        1,975        81   

Brokerage fees

     809        691        118        17        1,622        1,368        254        19   

Securities gains, net

     6,490        783        5,707          7,047        838        6,209     

Losses from prepayment of debt

     (6,199     (791     (5,408       (6,681     (791     (5,890  

Hedge ineffectiveness

     (180     2,809        (2,989       (65     4,112        (4,177  

Other

     1,809        1,853        (44     (2     6,303        3,442        2,861        83   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Total fee revenue

   $ 12,867      $ 13,905      $ (1,038     (7   $ 28,246      $ 25,743      $ 2,503        10   
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

Service charges and fees of $7.82 million were up $208,000, or 3%, from the second quarter of 2011. For the first six months of 2012, service charges and fees of $15.6 million were up $1.27 million, or 9%, from the same period in 2011. The increase was primarily due to new charges on deposit accounts that more than offset a decline in overdraft fees resulting from decreased utilization of our courtesy overdraft services.

Mortgage loans and related fees for the second quarter and first six months of 2012 were up $1.37 million, or 144%, and $1.98 million, or 81%, respectively, from the same periods in 2011. In the second quarter of 2012, United closed 507 loans totaling $79.8 million compared with 349 loans totaling $50.5 million in the second quarter of 2011. Origination volumes were driven by the changing interest rate environment which had a significant impact on refinancing activity. Year-to-date mortgage production in 2012 amounted to 1,024 loans totaling $161 million, compared to 830 loans totaling $125 million for the same period in 2011.

United recognized net securities gains of $6.49 million and $7.05 million for the three and six months ended June 30, 2012. Net securities gains totaled $783,000 in the second quarter of 2011 and $838,000 for the first six months of 2011. United also recognized charges from the prepayment of Federal Home Loan Bank advances and structured repurchase agreements in the second quarter and first six months of 2012 and 2011. The losses were part of the same balance sheet management activities that resulted in the securities gains. The balance sheet management activities included the sale of $175 million in securities and the prepayment of $75 million in fixed rate borrowings, the effect of which was to reduce sensitivity to rising interest rates and improve the net interest margin. The securities gains and prepayment losses were mostly offsetting and had little net impact on financial results in the periods incurred.

In the second quarter of 2012, United recognized $180,000 in losses from hedge ineffectiveness compared with $2.81 million in gains from hedge ineffectiveness in the second quarter of 2011. For the first six months of 2012, United recognized $65,000 in losses from hedge ineffectiveness compared with $4.11 million in gains for the same period of 2011. Much of the hedge ineffectiveness relates to terminated cash flow hedges where the gains realized on the terminated positions are being deferred over the original term of the derivative instrument. The ineffectiveness, which is caused by a decrease in qualifying prime-based loans, results in the accelerated recognition of the deferred gains. In 2012, a portion of the hedge ineffectiveness gains and losses resulted from ineffectiveness on fair value hedges of brokered deposits. The second quarter of 2012 included $223,000 in hedge ineffectiveness losses on fair value hedges. The first six months of 2012 included $189,000 of net hedge ineffectiveness losses on fair value hedges of brokered deposits.

Other fee revenue of $1.81 million for the second quarter of 2012 was down $44,000, or 2%. For the first six months of 2012, other fee revenue of $6.30 million was up 2.86 million, or 83%, from the same period in 2011. The first quarter of 2012 included $1.1 million in interest received for 2008’s federal tax refund and $728,000 in gains from the sale of low income housing tax credits.

 

38


Table of Contents

Operating Expenses

The following table presents the components of operating expenses for the three and six months ended June 30, 2012 and 2011.

Table 6—Operating Expenses

(in thousands)

 

     Three Months Ended                 Six Months Ended               
     June 30,     Change     June 30,      Change  
     2012     2011     Amount     Percent     2012     2011      Amount     Percent  

Salaries and employee benefits

   $ 24,297      $ 26,436      $ (2,139     (8   $ 49,522      $ 51,360       $ (1,838     (4

Communications and equipment

     3,211        3,378        (167     (5     6,366        6,722         (356     (5

Occupancy

     3,539        3,805        (266     (7     7,310        7,879         (569     (7

Advertising and public relations

     1,088        1,317        (229     (17     1,934        2,295         (361     (16

Postage, printing and supplies

     916        1,085        (169     (16     1,895        2,203         (308     (14

Professional fees

     1,952        2,350        (398     (17     3,927        5,680         (1,753     (31

FDIC assessments and other regulatory charges

     2,545        3,644        (1,099     (30     5,055        9,057         (4,002     (44

Amortization of intangibles

     730        760        (30     (4     1,462        1,522         (60     (4

Other

     4,181        4,062        119        3        8,118        10,491         (2,373     (23
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

   

Total excluding foreclosed property expenses

     42,459        46,837        (4,378     (9     85,589        97,209         (11,620     (12

Net (gains) losses on sales of foreclosed properties

     (269     (3,218     2,949          (176     8,802         (8,978  

Foreclosed property write downs

     1,008        3,118        (2,110       3,119        51,703         (48,584  

Foreclosed property maintenance expenses

     1,112        1,991        (879     (44     2,733        6,285         (3,552     (57
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

   

Total operating expenses

   $ 44,310      $ 48,728      $ (4,418     (9   $ 91,265      $ 163,999       $ (72,734     (44
  

 

 

   

 

 

   

 

 

     

 

 

   

 

 

    

 

 

   

Operating expenses for the second quarter of 2012 totaled $44.3 million, down $4.42 million, or 9%, from the second quarter of 2011. For the six months ended June 30, 2012, operating expenses totaled $91.3 million, down $72.7 million, or 44%, from the same period in 2011. Higher foreclosed property losses incurred in connection with United’s Problem Asset Disposition Plan were reflected in the six months ended June 30, 2011. Excluding foreclosed property costs, total operating expenses were $42.5 million and $85.6 million for the three and six months ended June 30, 2012, down $4.38 million, or 9%, from the second quarter of 2011 and down $11.6 million, or 12%, from a year ago. Decreases in operating expenses occurred in nearly every category reflecting management’s focused efforts in reducing costs and improving operating efficiency.

Salaries and employee benefits for the second quarter of 2012 were $24.3 million, down $2.14 million, or 8%, from the same period of 2011. For the first six months of 2012, salaries and employee benefits of $49.5 million were down $1.84 million, or 4%, from the first six months of 2011. The decrease was due to a combination of reduced staffing, lower group medical insurance costs and a 50% reduction in the matching contribution on United’s 401(k) and profit sharing plan that became effective on April 1, 2012. Headcount totaled 1,614 at June 30, 2012, compared to 1,767 at June 30, 2011.

Occupancy expense of $3.53 million and $7.31 million, respectively, for the second quarter and first six months of 2012 was down $266,000, or 7%, and down $569,000, or 7%, respectively, compared to the same periods of 2011. The decrease was across all subcategories of occupancy expense including building maintenance, insurance and depreciation.

Advertising and public relations expense for the second quarter of 2012 totaled $1.09 million, down $229,000, or 17%, from the second quarter of 2011. For the six months ended June 30, 2012 and 2011, advertising and public relations expense totaled $1.93 million and $2.30 million, respectively. The decrease for both periods is due to efforts to reduce discretionary spending.

Postage, printing and supplies expense for the second quarter of 2012 totaled $916,000, down $169,000, or 16%, from the same period of 2011. For the six months ended June 30, 2012 and 2011, postage, printing and supplies expense totaled $1.90 million and $2.20 million, respectively. The decrease was primarily due to lower office supplies and outside courier expenses.

Professional fees for the second quarter of 2012 of $1.95 million were down $398,000, or 17%, from the same period in 2011. For the six months ended June 30, 2012 professional fees of $3.93 million were down $1.75 million, or 31%, primarily due to professional service costs associated with the Bulk Loan Sale that were incurred in the first quarter of 2011.

FDIC assessments and other regulatory charges of $2.55 million and $5.06 million for the second quarter and first six months of 2012, decreased $1.10 million, or 30%, from the second quarter of 2011 and decreased $4.00 million, or 44%, compared to the first six months of 2011. The FDIC’s change to an asset based formula effective April 1, 2011 was more favorable to United and lowered United’s assessment. United’s assessment rate was reduced further late in the second quarter of 2011.

Other expense of $4.18 million for the second quarter of 2012 increased $119,000 from the second quarter of 2011. Year-to-date, other expense of $8.12 million decreased $2.37 million from the first six months of 2011. The year-to-date decrease was primarily due to $2.60 million of property taxes and other loan collateral costs incurred to prepare loans for the Bulk Loan Sale. The decrease for the quarter was primarily due to lower loan collection costs.

 

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Net gains on sales of foreclosed property totaled $269,000 for the second quarter of 2012, compared to net gains on sale of $3.22 million for the second quarter of 2011. For the six months ended June 30, 2012, net gains on sale were $176,000 compared to net losses on sale of $8.80 million for the same period of the prior year. Foreclosed property write-downs for the second quarter and first six months of 2012 were $1.01 million and $3.12 million compared to $3.12 million and $51.7 million a year ago. The year to date decrease reflected higher write downs in the first half of 2011 on foreclosed properties to expedite sales under the Problem Asset Disposition Plan. Foreclosed property maintenance expenses include legal fees, property taxes, marketing costs, utility services, maintenance and repair charges that totaled $1.11 million and $2.73 million, respectively, for the second quarter and first six months of 2012 compared with $1.99 million and $6.29 million, respectively, a year ago. Foreclosed property costs in general are down in the second quarter from a year ago due to lower balances of foreclosed property after execution of United’s Problem Asset Disposition Plan beginning in the first quarter of 2011.

Income Taxes

Income tax expense for the second quarter of 2012 was $450,000 as compared with income tax expense of $666,000 for the second quarter of 2011, representing an effective tax rate of approximately 6.48% and 5.25%, respectively. Because of the full valuation allowance on United’s net deferred tax asset, United’s tax expense on its pre-tax earnings represents adjustments to its reserve for uncertain tax positions and amounts payable under the Federal Alternative Minimum Tax.

At June 30, 2012, United reported no net deferred tax asset due to a full valuation allowance of $277 million. The Financial Accounting Standard’s Board Accounting Standards Codification (“ASC”) 740, Income Taxes, requires that companies assess whether a valuation allowance should be established against their deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. Management considers both positive and negative evidence and analyzes changes in near-term market conditions as well as other factors which may impact future operating results. In making such judgments, significant weight is given to evidence that can be objectively verified. The deferred tax assets are analyzed quarterly for changes affecting realizability. Because management has determined that the objective negative evidence outweighs the positive evidence, management has established a full valuation allowance against its net deferred tax asset.

As of February 22, 2011, United adopted a tax benefits preservation plan designed to protect its ability to utilize its substantial tax assets. Those tax assets include net operating losses that it could utilize in certain circumstances to offset taxable income and reduce its federal income tax liability and the future tax benefits from potential net unrealized built in losses. United’s ability to use its tax benefits would be substantially limited if it were to experience an ownership change as defined under Section 382. In general, an ownership change would occur if United’s “5-percent shareholders,” as defined under Section 382, collectively increase their ownership in United by more than 50% over a rolling three-year period. The tax benefits preservation plan is designed to reduce the likelihood that United will experience an ownership change by discouraging any person or group from becoming a beneficial owner of 4.99% or more of United’s common stock then outstanding.

In connection with the tax benefits preservation plan, on February 22, 2011, United entered into a share exchange agreement with the Elm Ridge Parties to transfer to the Company 1,551,126 shares of United’s common stock, in exchange for 16,613 shares of the Company’s series D preferred shares and warrants to purchase 1,551,126 shares of common stock. Prior to entering into the share exchange agreement, collectively, the Elm Ridge Parties were United’s largest shareholder. By exchanging the Elm Ridge Parties’ common stock for the Series D Preferred Shares and warrants, United eliminated its only “5-percent shareholder” and, as a result, obtained further protection against an ownership change under Section 382.

Additional information regarding income taxes, including a reconciliation of the differences between the recorded income tax provision and the amount of income tax computed by applying the statutory federal income tax rate to income before income taxes, can be found in Note 15 to the consolidated financial statements filed with United’s Annual Report on Form 10-K for the year ended December 31, 2011.

Balance Sheet Review

Total assets at June 30, 2012, December 31, 2011 and June 30, 2011 were $6.74 billion, $6.98 billion and $7.15 billion, respectively. Average total assets for the second quarter of 2012 were $6.99 billion, down from $7.36 billion in the second quarter of 2011.

 

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The following table presents a summary of the loan portfolio.

Table 7—Loans Outstanding (excludes loans covered by loss share agreement)

(in thousands)

 

     June 30,     December 31,     June 30,  
     2012     2011     2011  

By Loan Type

      

Commercial (secured by real estate)

   $ 1,836,477      $ 1,821,414      $ 1,741,754   

Commercial & industrial

     450,222        428,249        428,058   

Commercial construction

     169,338        164,155        195,190   
  

 

 

   

 

 

   

 

 

 

Total commercial

     2,456,037        2,413,818        2,365,002   

Residential mortgage

     1,128,336        1,134,902        1,177,226   

Residential construction

     408,966        448,391        501,909   

Consumer installment

     125,896        112,503        119,310   
  

 

 

   

 

 

   

 

 

 

Total loans

   $ 4,119,235      $ 4,109,614      $ 4,163,447   
  

 

 

   

 

 

   

 

 

 

As a percentage of total loans:

      

Commercial (secured by real estate)

     45     44     42

Commercial & industrial

     11        10        10   

Commercial construction

     4        4        5   
  

 

 

   

 

 

   

 

 

 

Total commercial

     60        58        57   

Residential mortgage

     27        28        28   

Residential construction

     10        11        12   

Consumer installment

     3        3        3   
  

 

 

   

 

 

   

 

 

 

Total

     100     100     100
  

 

 

   

 

 

   

 

 

 

By Geographic Location

      

North Georgia

   $ 1,387,204      $ 1,425,811      $ 1,499,687   

Atlanta MSA

     1,252,140        1,219,652        1,188,262   

North Carolina

     576,141        597,446        626,230   

Coastal Georgia

     369,280        346,189        325,650   

Gainesville MSA

     258,916        264,567        274,744   

East Tennessee

     275,554        255,949        248,874   
  

 

 

   

 

 

   

 

 

 

Total loans

   $ 4,119,235      $ 4,109,614      $ 4,163,447   
  

 

 

   

 

 

   

 

 

 

Substantially all of United’s loans are to customers (including customers who have a seasonal residence in United’s market areas) located in the immediate market areas of its community banks in Georgia, North Carolina, and Tennessee, and more than 85% of the loans are secured by real estate. At June 30, 2012, total loans, excluding loans acquired from SCB that are covered by loss sharing agreements with the FDIC, were $4.12 billion, a decrease of $44.2 million, or 1%, from June 30, 2011. The rate of loan growth began to decline in the first quarter of 2007 and the balances have continued to decline over the last four years. The decrease in the loan portfolio began with deterioration in the residential construction and housing markets. This deterioration resulted in part as an oversupply of lot inventory, houses and land within United’s markets, which further slowed construction activities and acquisition and development projects. The resulting recession that began in the housing market led to high rates of unemployment that resulted in stress in the other segments of United’s loan portfolio. Despite the weak economy and lack of loan demand, United has continued to pursue lending opportunities which resulted in $86.5 million in new loans funded during the second quarter of 2012 and net positive loan growth of $9.62 million in the first six months of 2012. The rate of decrease in the loan portfolio dropped significantly following the execution of the Problem Asset Disposition Plan in the first quarter of 2011 and has continued to stabilize resulting in the modest growth in the first half of 2012.

 

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Asset Quality and Risk Elements

United manages asset quality and controls credit risk through review and oversight of the loan portfolio as well as adherence to policies designed to promote sound underwriting and loan monitoring practices. United’s credit administration function is responsible for monitoring asset quality, establishing credit policies and procedures and enforcing the consistent application of these policies and procedures among all of the community banks. Additional information on the credit administration function is included in Item 1 under the heading Loan Review and Non-performing Assets in United’s Annual Report on Form 10-K for the year ended December 31, 2011.

United classifies performing loans as “substandard” when there is a well-defined weakness or weaknesses that jeopardize the repayment by the borrower and there is a distinct possibility that United could sustain some loss if the deficiency is not corrected. The table below presents performing substandard loans for the last five quarters.

Table 8 —Performing Substandard Loans

(in thousands)

 

     June 30,      March 31,      December 31,      September 30,      June 30,  
     2012      2012      2011      2011      2011  

By Category

              

Commercial (sec. by RE)

   $ 148,418       $ 133,840       $ 143,058       $ 134,356       $ 117,525   

Commercial & industrial

     15,916         17,217         15,753         24,868         16,645   

Commercial construction

     37,876         23,256         18,510         26,530         31,347   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total commercial

     202,210         174,313         177,321         185,754         165,517   

Residential mortgage

     73,277         75,736         76,442         76,707         70,396   

Residential construction

     45,450         64,274         71,955         76,179         74,277   

Consumer installment

     2,706         2,610         2,751         2,703         2,923   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 323,643       $ 316,933       $ 328,469       $ 341,343       $ 313,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

By Market

              

North Georgia

   $ 121,358       $ 131,253       $ 134,945       $ 156,063       $ 140,886   

Atlanta MSA

     105,647         94,191         99,453         97,906         97,931   

North Carolina

     38,049         38,792         40,302         36,724         30,202   

Coastal Georgia

     20,164         19,342         24,985         23,966         22,945   

Gainesville MSA

     20,524         18,745         17,338         19,615         14,957   

East Tennessee

     17,901         14,610         11,446         7,069         6,192   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total loans

   $ 323,643       $ 316,933       $ 328,469       $ 341,343       $ 313,113   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2012, performing substandard loans totaled $324 million and increased $6.71 million from the prior quarter-end, and increased $10.5 million from a year ago. The increase from the second quarter of 2011 was primarily in the commercial secured by real estate and commercial construction categories, primarily in the Atlanta MSA, western North Carolina, Gainesville MSA and east Tennessee markets.

Reviews of substandard performing and non-performing loans, troubled debt restructures, past due loans and larger credits, are conducted on a regular basis with management each quarter and are designed to identify risk migration and potential charges to the allowance for loan losses. These reviews are performed by the responsible lending officers and the loan review department and also consider such factors as the financial strength of borrowers, the value of the applicable collateral, past loan loss experience, anticipated loan losses, changes in risk profile, prevailing economic conditions and other factors. In addition to United’s internal loan review, United also uses external loan review to ensure the independence of the loan review process.

 

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The following table presents a summary of the changes in the allowance for loan losses for the three and six months ended June 30, 2012 and 2011.

Table 9—Allowance for Loan Losses

(in thousands)

 

     Three Months Ended June 30,     Six Months Ended June 30,  
     2012     2011     2012      2011  
           Problem (1)                         Problem (1)                
           Asset                         Asset                
           Disposition                         Disposition                
     Total     Plan     Other      Total     Total      Plan      Other      Total  

Balance beginning of period

   $ 113,601           $ 133,121      $ 114,468             $ 174,695   

Provision for loan losses

     18,000             11,000        33,000               201,000   

Charge-offs:

                    

Commercial (secured by real estate)

     4,418      $ (1,713   $ 5,146         3,433        8,346       $ 44,052       $ 8,088         52,140   

Commercial (commercial and industrial)

     888        (116     720         604        1,644         3,411         1,555         4,966   

Commercial construction

     88        (1,332     2,312         980        452         47,237         3,458         50,695   

Residential mortgage

     4,014        (1,255     5,922         4,667        9,781         30,139         11,204         41,343   

Residential construction

     9,846        (2,842     9,611         6,769        15,475         78,653         20,371         99,024   

Consumer installment

     408        (11     894         883        1,161         297         1,682         1,979   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total loans charged-off

     19,662        (7,269     24,605         17,336        36,859         203,789         46,358         250,147   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Recoveries:

                    

Commercial (secured by real estate)

     69        —          174         174        300         —           274         274   

Commercial (commercial and industrial)

     113        —          81         81        200         —           403         403   

Commercial construction

     —          —          111         111        30         —           111         111   

Residential mortgage

     152        —          78         78        544         —           371         371   

Residential construction

     283        —          140         140        598         —           257         257   

Consumer installment

     149        —          269         269        424         —           674         674   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total recoveries

     766        —          853         853        2,096         —           2,090         2,090   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Net charge-offs

     18,896      $ (7,269   $ 23,752         16,483        34,763       $ 203,789       $ 44,268         248,057   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance end of period

   $ 112,705           $ 127,638      $ 112,705             $ 127,638   
  

 

 

        

 

 

   

 

 

          

 

 

 

Total loans: *

                    

At period-end

   $ 4,119,235           $ 4,163,447      $ 4,119,235             $ 4,163,447   

Average

     4,112,995             4,196,375        4,115,315               4,364,401   

Allowance as a percentage of period-end loans

     2.74          3.07     2.74               3.07

As a percentage of average loans:

                    

Net charge-offs

     1.85             1.58        1.70               11.46   

Provision for loan losses

     1.76             1.05        1.61               9.29   

Allowance as a percentage of non-performing loans

     98             180        98               180   

 

* Excludes loans covered by loss sharing agreements with the FDIC
(1)

During the first quarter of 2011, United’s Problem Asset Dispostion Plan resulted in charge-offs totaling $186 million related to the Bulk Loan Sale that closed on April 18, 2011. The charge-offs were estimated based on indicative bids from prospective purchasers. Also in the first quarter related to United’s Problem Asset Disposition Plan was an additional $9.5 million in charge-offs related to other bulk loan sales that were completed in the first quarter of 2011 and $15.6 million in charge-offs on foreclosed properties related to the Problem Asset Disposition Plan. The loans sold in the Bulk Loan Sale that closed April 18, 2011 were reported in the loans held for sale category at March 31, 2011 Actual losses upon closing of the Bulk Loan Sale were $179 resulting in a $7.269 million reduction in charge-offs in the second quarter. Total losses related to the Problem Asset Disposition Plan for the first six months of 2011 were $203.8 million.

The provision for loan losses charged to earnings was based upon management’s judgment of the amount necessary to maintain the allowance at a level appropriate to absorb losses inherent in the loan portfolio at the balance sheet date. The amount each quarter is dependent upon many factors, including growth and changes in the composition of the loan portfolio, net charge-offs, delinquencies, management’s assessment of loan portfolio quality, the value of collateral, and other macro-economic factors and trends. The evaluation of these factors is performed quarterly by management through an analysis of the appropriateness of the allowance for loan losses.

At June 30, 2012 the allowance for loan losses was $113 million, or 2.74% of loans, compared with $114 million, or 2.79% of loans, at December 31, 2011 and $128 million, or 3.07% of loans, at June 30, 2011. The declining balance of the allowance for loan losses over the last four quarters reflects an overall improving trend in credit quality of the loan portfolio.

Management believes that the allowance for loan losses at June 30, 2012 reflects the losses inherent in the loan portfolio. This assessment involves uncertainty and judgment; therefore, the adequacy of the allowance for loan losses cannot be determined with precision and may be subject to change in future periods. The amount of any changes could be significant if management’s assessment of loan quality or collateral values change substantially with respect to one or more loan relationships or portfolios. In addition, bank regulatory authorities, as part of their periodic examination of the Bank, may require adjustments to the provision for loan losses in future periods if, in their opinion, the results of their review warrant such additions. See the “Critical Accounting Policies” section for additional information on the allowance for loan losses.

 

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Nonperforming Assets

The table below summarizes nonperforming assets, excluding SCB’s assets covered by the loss-sharing agreement with the FDIC. Those assets have been excluded from nonperforming assets, as the loss-sharing agreement with the FDIC and purchase price adjustments to reflect credit losses effectively eliminate the likelihood of recognizing any losses on the covered assets.

Table 10 — Nonperforming Assets

(in thousands)

 

     June 30,     December 31,     June 30,  
     2012     2011     2011  

Nonperforming loans*

   $ 115,340      $ 127,479      $ 71,065   

Foreclosed properties (OREO)

     30,421        32,859        47,584   
  

 

 

   

 

 

   

 

 

 

Total nonperforming assets

   $ 145,761      $ 160,338      $ 118,649   
  

 

 

   

 

 

   

 

 

 

Nonperforming loans as a percentage of total loans

     2.80     3.10     1.71

Nonperforming assets as a percentage of total loans and OREO

     3.51        3.87        2.82   

Nonperforming assets as a percentage of total assets

     2.16        2.30        1.66   

 

* There were no loans 90 days or more past due that were still accruing at period end.

At June 30, 2012, nonperforming loans were $115 million, compared to $127 million at December 31, 2011 and $71.1 million at June 30, 2011. Contributing to the increase in the ratio of nonperforming loans to total loans from June 30, 2011 to June 30, 2012 was the classification of United’s largest lending relationship. Nonperforming assets, which include nonperforming loans and foreclosed real estate, totaled $146 million at June 30, 2012, compared with $160 million at December 31, 2011 and $119 million at June 30, 2011. United sold $10.5 million and $19.1 million, respectively, of foreclosed properties during the second quarter and first six months of 2012. Both of these events helped lower the balance of foreclosed properties by 36% compared to June 30, 2011.

United’s policy is to place loans on nonaccrual status when, in the opinion of management, the principal and interest on a loan is not likely to be repaid in accordance with the loan terms or when the loan becomes 90 days past due and is not well secured and in the process of collection. When a loan is classified on nonaccrual status, interest previously accrued but not collected is reversed against current interest revenue. Principal and interest payments received on a nonaccrual loan are applied to reduce outstanding principal.

 

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The following table summarizes non-performing assets by category and market. As with Tables 7, 8 and 10, assets covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB, are excluded from this table.

Table 11—Nonperforming Assets by Quarter (1)

(in thousands)

 

    June 30, 2012     December 31, 2011     June 30, 2011  
    Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total  
    Loans     Properties     NPAs     Loans     Properties     NPAs     Loans     Properties     NPAs  

BY CATEGORY

                 

Commercial (sec. by RE)

  $ 19,115      $ 10,586      $ 29,701      $ 27,322      $ 9,745      $ 37,067      $ 17,764      $ 6,796      $ 24,560   

Commercial & industrial

    34,982        —          34,982        34,613        —          34,613        1,998        —          1,998   

Commercial construction

    18,175        2,732        20,907        16,655        3,336        19,991        2,782        6,764        9,546   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total commercial

    72,272        13,318        85,590        78,590        13,081        91,671        22,544        13,560        36,104   

Residential mortgage

    16,631        5,591        22,222        22,358        6,927        29,285        24,809        9,056        33,865   

Residential construction

    25,530        11,512        37,042        25,523        12,851        38,374        22,643        24,968        47,611   

Consumer installment

    907        —          907        1,008        —          1,008        1,069        —          1,069   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total NPAs

  $ 115,340      $ 30,421      $ 145,761      $ 127,479      $ 32,859      $ 160,338      $ 71,065      $ 47,584      $ 118,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance as a % of Unpaid Principal

    68.8     39.3     59.4     71.3     35.9     59.3     64.5     32.6     46.3

BY MARKET

                 

North Georgia

  $ 77,332      $ 13,546      $ 90,878      $ 88,600      $ 15,136      $ 103,736      $ 28,117      $ 21,278      $ 49,395   

Atlanta MSA

    17,593        8,651        26,244        14,480        6,169        20,649        14,700        11,239        25,939   

North Carolina

    10,657        3,287        13,944        15,100        5,365        20,465        15,153        8,953        24,106   

Coastal Georgia

    5,822        785        6,607        5,248        1,620        6,868        5,357        2,564        7,921   

Gainesville MSA

    991        2,998        3,989        2,069        3,760        5,829        4,505        3,174        7,679   

East Tennessee

    2,945        1,154        4,099        1,982        809        2,791        3,233        376        3,609   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total NPAs

  $ 115,340      $ 30,421      $ 145,761      $ 127,479      $ 32,859      $ 160,338      $ 71,065      $ 47,584      $ 118,649   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

Nonperforming assets in the residential construction category were $37.0 million at June 30, 2012, compared with $47.6 million at June 30, 2011, a decrease of $10.6 million, or 22%. Commercial nonperforming assets increased from $36.1 million at June 30, 2011 to $85.6 million at June 30, 2012. Residential mortgage non-performing assets of $22.2 million decreased $11.6 million from June 30, 2011. The overall increase in nonperforming assets was concentrated in the North Georgia market and is mostly due to placing United’s largest lending relationship on nonaccrual status in the third quarter of 2011. Placing this loan relationship on nonaccrual was also the cause of the increase in commercial nonperforming assets from June 30, 2011.

At June 30, 2012, December 31, 2011, and June 30, 2011 United had $168 million, $124 million and $46.2 respectively, in loans with terms that have been modified in a troubled debt restructuring (“TDR”). Included therein were $26.0 million, $17.9 million and $4.75 million of TDRs that were not performing in accordance with their modified terms and were included in nonperforming loans. The remaining TDRs with an aggregate balance of $142 million, $106 million and $41.5 million, respectively, were performing according to their modified terms and are therefore not considered to be nonperforming assets.

At June 30, 2012, December 31, 2011, and June 30, 2011, there were $294 million, $257 million and $35.7 million, respectively, of loans classified as impaired under the definition outlined in the ASC. Included in impaired loans at June 30, 2012, December 31, 2011 and June 30, 2011, was $215 million, $189 million and $32.8 million, respectively that did not require specific reserves or had previously been charged down to net realizable value. The balance of impaired loans at June 30, 2012, December 31, 2011 and June 30, 2011, of $78.9 million, $68.8 million and $2.86 million, respectively, had specific reserves that totaled $17.4 million, $14.8 million and $1.17 million, respectively. The average recorded investment in impaired loans for the second quarters of 2012 and 2011 was $287 million and $42.1 million, respectively. For the three and six months ended June 30, 2012, United recognized $2.42 and $4.69, respectively, in interest revenue on impaired loans. There was no interest revenue recognized on loans while they were impaired for the first six months of 2011. United’s policy is to discontinue the recognition of interest revenue for loans classified as impaired under ASC 310-10-35, Receivables, when a loan meets the criteria for nonaccrual status. Impaired loans increased from 2011 to 2012 due to the classification and change of accrual status of United’s largest lending relationship and the increase in TDRs which are considered impaired.

 

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The table below summarizes activity in non-performing assets by quarter. Assets covered by loss sharing agreements with the FDIC, related to the acquisition of SCB, are not included in this table.

Table 12—Activity in Nonperforming Assets by Quarter

(in thousands)

 

     Second Quarter 2012 (1)     Second Quarter 2011 (1)  
     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total  
     Loans     Properties     NPAs     Loans     Properties     NPAs  

Beginning Balance

   $ 129,704      $ 31,887      $ 161,591      $ 83,769      $ 54,378      $ 138,147   

Loans placed on non-accrual (2)

     29,364        —          29,364        35,911        —          35,911   

Payments received

     (15,027     —          (15,027     (7,702     —          (7,702

Loan charge-offs

     (19,382     —          (19,382     (18,888     —          (18,888

Foreclosures

     (9,319     9,319        —          (22,025     22,025        —     

Capitalized costs

     —          415        415        —          20        20   

Note / property sales

     —          (10,461     (10,461     —          (28,939     (28,939

Write downs

     —          (1,008     (1,008     —          (3,118     (3,118

Net gains (losses) on sales

     —          269        269        —          3,218        3,218   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 115,340      $ 30,421      $ 145,761      $ 71,065      $ 47,584      $ 118,649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     First Six Months 2012 (1)     First Six Months 2011 (1)(2)  
     Nonaccrual     Foreclosed     Total     Nonaccrual     Foreclosed     Total  
     Loans     Properties     NPAs     Loans     Properties     NPAs  

Beginning Balance

   $ 127,479      $ 32,859      $ 160,338      $ 179,094      $ 142,208      $ 321,302   

Loans placed on non-accrual (2)

     61,801        —          61,801        90,641        —          90,641   

Payments received

     (20,972     —          (20,972     (11,252     —          (11,252

Loan charge-offs

     (34,115     —          (34,115     (62,857     —          (62,857

Foreclosures

     (18,853     18,853        —          (39,077     39,077        —     

Capitalized costs

     —          744        744        —          290        290   

Note / property sales

     —          (19,092     (19,092     (11,400     (73,486     (84,886

Loans transferred to held for sale

     —          —          —          (74,084     —          (74,084

Write downs

     —          (3,119     (3,119     —          (51,703     (51,703

Net losses on sales

     —          176        176        —          (8,802     (8,802
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 115,340      $ 30,421      $ 145,761      $ 71,065      $ 47,584      $ 118,649   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes non-performing loans and foreclosed properties covered by the loss-sharing agreement with the FDIC, related to the acquisition of SCB.

(2) 

The NPA activity shown for the first six months of 2011 is presented with all activity related to loans transferred to the held for sale classification on one line as if those loans were transferred to held for sale at the beginning of the period. During the first quarter of 2011, $27.1 million in loans transferred to held for sale were placed on nonaccrual, $1.1 million in payments were received on nonaccrual loans transferred to held for sale and $66.6 million in charge-offs were recorded on nonaccrual loans transferred to held for sale to mark them down to the expected proceeds from the sale.

Foreclosed property is initially recorded at fair value, less estimated costs to sell. If the fair value, less estimated costs to sell at the time of foreclosure, is less than the loan balance, the deficiency is charged against the allowance for loan losses. If the lesser of fair value, less estimated costs to sell or the listed selling price, less the costs to sell, of the foreclosed property decreases during the holding period, a valuation allowance is established with a charge to foreclosed property expense. When the foreclosed property is sold, a gain or loss is recognized on the sale for the difference between the sales proceeds and the carrying amount of the property. Financed sales of foreclosed property are accounted for in accordance with ASC 360-20, Real Estate Sales.

For the second quarter and first six months of 2012, United transferred $9.32 million and $18.9 million, respectively, of loans into foreclosed property. During the same periods, proceeds from sales of foreclosed property were $10.5 million and $19.1 million, respectively, which includes $2.54 million and $4.47 million of sales that were financed by United, respectively. During the second quarter and first six months of 2011, United transferred $22.0 million and $39.1 million, respectively, of loans into foreclosed property. During the same periods, proceeds from sales of foreclosed properties were $28.9 million and $73.5 million, respectively, which includes $4.63 million and $13.2 million, respectively, of sales that were financed by United. During the first quarter of 2011, United recorded $48.6 million in write-downs on foreclosed property in order to expedite sales in the following quarters as part of its Problem Asset Disposition Plan.

 

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Investment Securities

The composition of the investment securities portfolio reflects United’s investment strategy of maintaining an appropriate level of liquidity while providing a relatively stable source of revenue. The investment securities portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as required collateral for certain deposits. Total investment securities at June 30, 2012 decreased $203 million from a year ago.

At June 30, 2012, United had securities held to maturity with a carrying value of $283 million and securities available for sale totaling $1.70 billion. At June 30, 2012, December 31, 2011, and June 30, 2011, the securities portfolio represented approximately 29%, 30%, and 31% of total assets, respectively.

The investment securities portfolio primarily consists of U.S. government sponsored agency mortgage-backed securities, non-agency mortgage-backed securities, U.S. government agency securities, corporate securities, municipal securities and asset-backed securities. Mortgage-backed securities rely on the underlying pools of mortgage loans to provide a cash flow of principal and interest. The actual maturities of these securities will differ from contractual maturities because loans underlying the securities can prepay. Decreases in interest rates will generally cause an acceleration of prepayment levels. In a declining interest rate environment, United may not be able to reinvest the proceeds from these prepayments in assets that have comparable yields. In a rising rate environment, the opposite occurs. Prepayments tend to slow and the weighted average life extends. This is referred to as extension risk which can lead to lower levels of liquidity due to the delay of cash receipts and can result in the holding of a below market yielding asset for a longer period of time.

Other Intangible Assets

Other intangible assets, primarily core deposit intangibles representing the value of United’s acquired deposit base, are amortizing intangible assets that are required to be tested for impairment only when events or circumstances indicate that impairment may exist. There were no events or circumstances that led management to believe that any impairment exists in United’s other intangible assets.

Deposits

United initiated several programs in early 2009 to improve core earnings by growing customer transaction deposit accounts and lowering overall pricing on deposit accounts to improve its net interest margin and increase net interest revenue. The programs were very successful in increasing core transaction deposit accounts and allowing for the reduction of more costly time deposit balances as United’s funding needs decreased due to lower loan demand. United has continued to pursue customer transaction deposits by stressing its high customer satisfaction scores.

Total deposits as of June 30, 2012 were $5.82 billion, a decrease of $361 million from June 30, 2011. Total non-interest-bearing demand deposit accounts of $1.15 billion increased $251 million, or 28%, due to the success of core deposit programs. Also impacted by the programs were NOW, money market and savings accounts of $2.53 billion which increased $39.1 million, or 2%, from June 30, 2011.

Total time deposits, excluding brokered deposits, as of June 30, 2012 were $1.93 billion, down $561 million from June 30, 2011. Time deposits less than $100,000 totaled $1.16 billion, a decrease of $344 million, or 23%, from a year ago. Time deposits of $100,000 and greater totaled $764 million as of June 30, 2012, a decrease of $217 million, or 22%, from June 30, 2011. United continued to offer low rates on certificates of deposit, allowing balances to decline as United’s funding needs declined due to weak loan demand.

Wholesale Funding

The Bank is a shareholder in the Federal Home Loan Bank (“FHLB”) of Atlanta. Through this affiliation, FHLB secured advances totaled $125.1 million and $40.6 million as of June 30, 2012 and 2011, respectively. United anticipates continued use of this short and long-term source of funds. FHLB advances outstanding at June 30, 2012 had fixed interest rates ranging from .21% to .24%. During the second quarter of 2012 and 2011, United prepaid approximately $25.0 million and $14.5 million, respectively, of fixed-rate advances and incurred prepayment charges of $1.72 million and $791,000, respectively. Additional information regarding FHLB advances is provided in Note 11 to the consolidated financial statements included in United’s Annual Report on Form 10-K for the year ended December 31, 2011.

At June 30, 2012 and 2011, United had $53.7 million and $104 million, respectively, in repurchase agreements and other short-term borrowings outstanding. During the second quarter of 2012, United prepaid $50 million in structured repurchase agreements and incurred prepayment charges of $4.48 million. United takes advantage of these additional sources of liquidity when rates are favorable compared to other forms of short-term borrowings, such as FHLB advances and brokered deposits.

 

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Table of Contents

Interest Rate Sensitivity Management

The absolute level and volatility of interest rates can have a significant effect on United’s profitability. The objective of interest rate risk management is to identify and manage the sensitivity of net interest revenue to changing interest rates, in order to achieve United’s overall financial goals. Based on economic conditions, asset quality and various other considerations, management establishes tolerance ranges for interest rate sensitivity and manages within these ranges.

United’s net interest revenue, and the fair value of its financial instruments, are influenced by changes in the level of interest rates. United manages its exposure to fluctuations in interest rates through policies established by the Asset/Liability Management Committee (“ALCO”). ALCO meets periodically and has responsibility for approving asset/liability management policies, formulating and implementing strategies to improve balance sheet positioning and/or earnings, and reviewing United’s interest rate sensitivity.

One of the tools management uses to estimate the sensitivity of net interest revenue to changes in interest rates is an asset/liability simulation model. Resulting estimates are based upon a number of assumptions for each scenario, including the level of balance sheet growth, loan and deposit repricing characteristics and the rate of prepayments. The ALCO regularly reviews the assumptions for accuracy based on historical data and future expectations, however, actual net interest revenue may differ from model results. The primary objective of the simulation model is to measure the potential change in net interest revenue over time using multiple interest rate scenarios. The base scenario assumes rates remain flat and is the scenario to which all others are compared in order to measure the change in net interest revenue. Policy limits are based on gradually rising and falling rate scenarios, which are compared to this base scenario. Another commonly analyzed scenario is a most-likely scenario that projects the expected change in rates based on the slope of the yield curve. Other scenarios analyzed may include rate shocks, narrowing or widening spreads, and yield curve steepening or flattening. While policy scenarios focus on a twelve month time frame, longer time horizons are also modeled.

United’s policy is based on the 12-month impact on net interest revenue of interest rate ramps that increase 200 basis points and decrease 200 basis points from the base scenario. In the ramp scenarios, rates change 25 basis points per month over the initial eight months. The policy limits the change in net interest revenue over the first 12 months to a 10% decrease in either scenario. The policy ramp and base scenarios assume a static balance sheet. Historically low rates on June 30, 2012 and 2011 made use of the down 200 basis points scenario problematic. At June 30, 2012 United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate 1.17% increase in net interest revenue over twelve months, and a 25 basis point decrease would cause an approximate 1.23% decrease in net interest revenue over twelve months. At June 30, 2011, United’s simulation model indicated that a 200 basis point increase in rates would cause an approximate .01% increase in net interest revenue and a 25 basis point decrease in rates over twelve months would cause an approximate .75% increase in net interest revenue.

Interest rate sensitivity is a function of the repricing characteristics of the portfolio of assets and liabilities. These repricing characteristics are the time frames within which the interest-earning assets and interest-bearing liabilities are subject to change in interest rates either at replacement, repricing or maturity during the life of the instruments. Interest rate sensitivity management focuses on the maturity structure of assets and liabilities and their repricing characteristics during periods of changes in market interest rates. Effective interest rate sensitivity management seeks to ensure that both assets and liabilities respond to changes in interest rates within an acceptable timeframe, thereby minimizing the effect of interest rate changes on net interest revenue.

United may have some discretion in the extent and timing of deposit repricing depending upon the competitive pressures in the markets in which it operates. Changes in the mix of earning assets or supporting liabilities can either increase or decrease the net interest margin without affecting interest rate sensitivity. The interest rate spread between an asset and its supporting liability can vary significantly even when the timing of repricing for both the asset and the liability remains the same, due to the two instruments repricing according to different indices.

Varying interest rate environments can create unexpected changes in prepayment levels of assets and liabilities that are not reflected in an interest rate sensitivity gap analysis. These prepayments may have significant effect on the net interest margin. Because of these limitations, an interest sensitivity gap analysis alone generally does not provide an accurate assessment of exposure to changes in interest rates.

In order to manage its interest rate sensitivity, United periodically enters into off-balance sheet contracts that are considered derivative financial instruments. Derivative financial instruments can be a cost-effective and capital-effective means of modifying the repricing characteristics of on-balance sheet assets and liabilities. These contracts generally consist of interest rate swaps under which United pays a variable rate (or fixed rate, as may be the case) and receives a fixed rate (or variable rate, as may be the case).

United’s derivative financial instruments are classified as either cash flow or fair value hedges. The change in fair value of cash flow hedges is recognized in other comprehensive income. Fair value hedges recognize currently in earnings both the effect of the change in the fair value of the derivative financial instrument and the offsetting effect of the change in fair value of the hedged asset or liability associated with the particular risk of that asset or liability being hedged.

 

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Table of Contents

The following table presents United’s active derivative contracts used for hedging purposes.

Table 13—Derivative Financial Instruments

(in thousands)

 

Type of Instrument

  Hedge
Designation
  Hedged Item   Current
Notional
    Trade
Date
    Effective
Date
    Maturity
Date
    Pay Rate   Receive Rate   Fair Value (H)  
                  Asset     Liability  

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD   $ 15,000        10/12/11        11/10/11        11/10/31      3 mo. LIBOR minus 60 bps   (A)   $ —        $ 529   

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD     17,000        01/19/12        02/17/12        08/17/27      3 mo. LIBOR minus 45 bps   (B)     —          48   

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD     17,000        02/14/12        02/27/12        08/27/27      3 mo. LIBOR minus 45 bps   (C)     —          62   

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD     15,500        03/05/12        03/23/12        09/23/27      3 mo. LIBOR minus 45 bps   (D)     —          66   

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD     14,000        04/04/12        04/25/12        10/25/27      3 mo. LIBOR minus 40 bps   3.00000%     68        —     

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD     12,500        05/16/12        06/08/12        06/08/32      3 mo. LIBOR minus 43 bps   (E)     —          180   

Receive Fixed Cancellable Swap

  Fair Value   Brokered CD     13,000        06/12/12        06/28/12        06/28/32      3 mo. LIBOR minus 38.5
bps
  (F)     —          247   

Pay Fixed Swap

  Cash Flow   Short-Term, Fixed Rate Debt     50,000        04/02/12        04/07/14        04/07/17      1.69500%   3 mo. LIBOR     —          839   

Pay Fixed Swap

  Cash Flow   Short-Term, Fixed Rate Debt     50,000        04/02/12        04/21/14        04/21/17      1.72125%   3 mo. LIBOR     —          854   

Pay Fixed Swap

  Cash Flow   Short-Term, Fixed Rate Debt     100,000        04/10/12        03/03/14        03/01/17      1.43750%   3 mo. LIBOR     —          1,027   

Pay Fixed Swap

  Cash Flow   Money Market Deposts     100,000        05/02/12        05/01/14        05/01/19      1.88750%   1 mo. LIBOR     —          1,952   

Pay Fixed Swap

  Cash Flow   Money Market Deposts     100,000        05/31/12        07/01/14        07/01/18      1.39250%   1 mo. LIBOR     —          183   
     

 

 

             

 

 

   

 

 

 

Total Hedging Positions

      $ 504,000                $ 68      $ 5,987   
     

 

 

             

 

 

   

 

 

 

 

(A) 

Receive rate is fixed at 5.00% to November 10, 2012, then 4 * ((10-year Constant Maturity Swap rate—2-year Constant Maturity Swap rate)—50 basis points), capped at 5.00% and floored at 0.00%. Swap is callable by counterparty on November 10, 2012 and quarterly thereafter on the 10th with 15 calendar days notice.

(B) 

Receive rate is fixed according to the following schedule: From 2/17/12 to 2/17/20: 2.25%; From 2/17/20 to 2/17/22: 2.30%; From 2/17/22 to 2/17/23: 3.00%; From 2/17/23 to 2/17/24: 4.00%; From 2/17/24 to 2/17/25: 7.00%; From 2/17/25 to 8/17/27: 10.00%. Swap is callable by counterparty quarterly commencing on May 17, 2012 with 20 business days notice prior to the redemption date.

(C) 

Receive rate is fixed according to the following schedule: From 2/27/12 to 2/27/18: 2.00%; From 2/27/18 to 2/27/22: 2.50%; From 2/27/22 to 2/27/23: 3.00%; From 2/27/23 to 2/27/24: 4.00%; From 2/27/24 to 2/27/25: 7.00%; From 2/27/25 to 8/27/27: 10.00%. Swap is callable by counterparty semi-annually commencing on August 27, 2012 with 25 business days notice prior to the redemption date.

(D) 

Receive rate is fixed according to the following schedule: From 3/23/12 to 3/23/17: 2.25%; From 3/23/17 to 3/23/20: 2.38%; From 3/23/20 to 3/23/23: 2.50%; From 3/23/23 to 3/23/24: 3.00%; From 3/23/24 to 3/23/25: 4.00%; From 3/23/25 to 3/23/26: 6.00%; From 3/23/26 to 9/23/27: 10.00%. Swap is callable by counterparty at any time commencing on September 24, 2012 with 15 calendar days notice prior to the redemption date.

(E) 

Receive rate is fixed according to the following schedule: From 6/8/12 to 6/8/17: 2.25%; From 6/8/17 to 6/8/22: 2.70%; From 6/8/22 to 6/8/27: 3.20%; From 6/8/27 to 6/8/28: 4.00%; From 6/8/28 to 6/8/29: 5.00%; From 6/8/29 to 6/8/30: 6.00%; From 6/8/30 to 6/8/31: 8.00%; From 6/8/31 to 6/8/32: 10.00%. Swap is callable by counterparty at any time commencing on December 8, 2012 with 15 calendar days notice prior to the redemption date.

(F) 

Receive rate is fixed according to the following schedule: From 6/28/12 to 6/28/17: 2.30%; From 6/28/17 to 6/28/22: 2.50%; From 6/28/22 to 6/28/27: 3.00%; From 6/28/27 to 6/28/28: 4.00%; From 6/28/28 to 6/28/29: 5.00%; From 6/28/29 to 6/28/30: 6.00%; From 6/28/30 to 6/28/31: 8.00%; From 6/28/31 to 6/28/32: 10.00%. Swap is callable by counterparty at any time commencing on December 28, 2012 with 15 calendar days notice prior to the redemption date.

(H) 

Fair value does not include accrued interest

From time to time, United will terminate swap or floor positions when conditions change and the position is no longer necessary to manage United’s overall sensitivity to changes in interest rates. In those situations where the terminated contract was in an effective hedging relationship at the time of termination and the hedging relationship is expected to remain effective throughout the original term of the contract, the resulting gain or loss is amortized over the remaining life of the original contract. For swap contracts, the gain or loss is amortized over the remaining original contract term using the straight line method of amortization. At June 30, 2012, United had $2.30 million in gains from terminated derivative positions included in other comprehensive income that will be amortized into earnings over their remaining original contract terms. Approximately $2.23 million is expected to be reclassified into interest revenue over the next twelve months.

United’s policy requires all non-customer facing derivative financial instruments be used only for asset/liability management through the hedging of specific transactions or positions, and not for trading or speculative purposes. Management believes that the risk associated with using derivative financial instruments to mitigate interest rate risk sensitivity is minimal and should not have any material unintended effect on our financial condition or results of operations. In order to mitigate potential credit risk, from time to time United may require the counterparties to derivative contracts to pledge securities as collateral to cover the net exposure.

Liquidity Management

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs and to take advantage of revenue producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of United to maintain a sufficient level of liquidity in all expected economic environments. Liquidity is defined as the ability to convert assets into cash or cash equivalents without significant loss and to raise additional funds by increasing liabilities. Liquidity management involves maintaining United’s ability to meet the daily cash flow requirements of the Bank’s customers, both depositors and borrowers. In addition, because United is a separate entity and apart from the Bank, it must provide for its own liquidity. United is responsible for the payment of dividends declared for its common and preferred shareholders, and interest and principal on any outstanding debt or trust preferred securities.

 

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Because substantially all of United’s liquidity is obtained from subsidiary service fees and dividends from the Bank, which are limited by applicable law and an informal memorandum of understanding the Bank has entered into with the FDIC and the Georgia Department of Banking and Finance (the “Bank MOU”), United currently has limited internal capital resources to meet these obligations. United has not received a dividend from the Bank since 2008 and does not anticipate receiving dividends from the Bank until 2013.

Two key objectives of asset/liability management are to provide for adequate liquidity in order to meet the needs of customers and to maintain an optimal balance between interest-sensitive assets and interest-sensitive liabilities to optimize net interest revenue. Daily monitoring of the sources and uses of funds is necessary to maintain a position that meets both requirements.

The asset portion of the balance sheet provides liquidity primarily through loan principal repayments and the maturities and sales of securities, as well as the ability to use these as collateral for borrowings on a secured basis. We also maintain excess funds in short-term interest-bearing assets that provide additional liquidity. Mortgage loans held for sale totaled $18.6 million at June 30, 2012, and typically turn over every 45 days as the closed loans are sold to investors in the secondary market. In addition, at June 30, 2012 United held $646 million in excess liquidity including $94.5 million in cash equivalent balances, primarily balances in excess of reserve requirements at the Federal Reserve Bank and $442 million in floating rate securities.

The liability section of the balance sheet provides liquidity through interest-bearing and noninterest-bearing deposit accounts. Federal funds purchased, Federal Reserve short-term borrowings, FHLB advances and securities sold under agreements to repurchase are additional sources of liquidity and represent United’s incremental borrowing capacity. These sources of liquidity are generally short-term in nature and are used as necessary to fund asset growth and meet other short-term liquidity needs.

At June 30, 2012, United had sufficient qualifying collateral to increase FHLB advances by $629 million and Federal Reserve discount window capacity of $478 million. United also has the ability to raise substantial funds through brokered deposits. In addition to these wholesale sources, United has the ability to attract retail deposits at any time by competing more aggressively on pricing.

As disclosed in United’s consolidated statement of cash flows, net cash provided by operating activities was $92.3 million for the six months ended June 30, 2012. The net income of $18.0 million for the six month period included non-cash expenses for the provision for loan losses of $33.0 million; depreciation, amortization and accretion of $16.5 million and losses and write downs on foreclosed property of $2.94 million. In addition, other assets decreased $22.8 million. Net cash provided by investing activities of $85.2 million consisted primarily of the proceeds from sales, maturities and calls of securities totaling $707 million partially offset by securities purchases of $581 million, a net increase in loans of 58.8 million, and purchases of premises and equipment of $2.58 million. Net cash used in financing activities of $251 million consisted primarily of a $276 million decrease in deposits partially offset by a net increase of $28.9 million in wholesale borrowings. In the opinion of management, United’s liquidity position at June 30, 2012, was sufficient to meet its expected cash flow requirements.

Capital Resources and Dividends

Shareholders’ equity at June 30, 2012 was $576 million, an increase of $509,000 from December 31, 2011. Accumulated other comprehensive loss, which includes unrealized gains and losses on securities available for sale and the unrealized gains and losses on derivatives qualifying as cash flow hedges, is excluded in the calculation of regulatory capital adequacy ratios. Excluding the change in the accumulated other comprehensive income, shareholders’ equity increased $14.3 million from December 31, 2011.

United accrued $3.03 million and $6.06 million, respectively, in dividends, including accretion of discounts, on Series A, Series B and Series D preferred stock in the second quarter and first six months of 2012.

United granted a warrant to Fletcher to purchase common stock equivalent junior preferred stock that would be convertible into 1,411,765 common shares exercisable at a price equivalent to $21.25 per share. United has received purported partial warrant exercise notices from Fletcher with respect to its warrants that include incorrect calculations of the number of settlement shares Fletcher would receive upon exercise. On June 17, 2011, United completed a reclassification of its common stock in the form of 1-for-5 reverse stock split, or recombination. United believes that any current exercise of Fletcher’s warrant would not result in the issuance of any settlement shares because the warrant may only be exercised for net shares via a cashless exercise formula, and the reverse stock split-adjusted market price component of that formula does not exceed the exercise price to yield any net shares. United has responded to Fletcher with United’s calculations related to the warrant.

In addition, in the lawsuit filed by FILB related to purported contractual rights that FILB claims were assigned to it by Fletcher, FILB alleges, like Fletcher, that United’s 2011 reclassification of its common stock should be ignored for purposes of calculating the number of shares United’s common stock issuable upon the redemption of United’s preferred stock and thus result in increasing the number of shares of United common stock that FILB could otherwise obtain. United believes the lawsuit is meritless for several reasons, and will defend it aggressively.

 

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In November 2011, United entered into an informal memorandum of understanding with the Federal Reserve Bank and the Georgia Department of Banking and Finance (the “Holding Company MOU”). The Holding Company MOU provides, that United may not incur additional indebtedness, pay cash dividends, make payments on our trust preferred securities or subordinated indebtedness or repurchase outstanding stock without prior approval of the Federal Reserve. Additionally, the Holding Company MOU requires, among other things, that United ensures that the Bank functions in a safe and sound manner. United believes it is in compliance with all requirements of the Holding Company MOU.

The Bank is currently subject to the Bank MOU which requires, among other things, that the Bank maintain its Tier 1 leverage ratio at not less than 8% and its total risk-based capital ratio at not less than 10% during the life of the Bank MOU. Additionally, the Bank MOU requires, among other things, that prior to declaring or paying any cash dividends to United, the Bank must obtain the written consent of its regulators. The Bank believes it is in compliance with all requirements of the Bank MOU.

United’s common stock trades on the Nasdaq Global Select Market under the symbol “UCBI”. Below is a quarterly schedule of high, low and closing stock prices and average daily volume for 2012 and 2011.

Table 14—Stock Price Information

 

     2012      2011  
     High      Low      Close      Avg Daily
Volume
     High      Low      Close      Avg Daily
Volume
 

First quarter

   $ 10.30       $ 6.37       $ 9.75         142,987       $ 11.85       $ 5.95       $ 11.65         227,321   

Second quarter

     9.77         7.76         8.57         145,132         14.65         9.80         10.56         139,741   

Third quarter

                 11.33         7.67         8.49         214,303   

Fourth quarter

                 8.90         6.22         6.99         202,024   

 

* The stock price information shown above has been adjusted to reflect United’s 1-for-5 reverse stock split as though it had occurred at the beginning of the earliest reported period.

The Federal Reserve Board has issued guidelines for the implementation of risk-based capital requirements by U.S. banks and bank holding companies. These risk-based capital guidelines take into consideration risk factors, as defined by regulators, associated with various categories of assets, both on and off-balance sheet. Under the guidelines, capital strength is measured in two tiers that are used in conjunction with risk-weighted assets to determine the risk-based capital ratios. The guidelines require an 8% total risk-based capital ratio, of which 4% must be Tier I capital. However, to be considered well-capitalized under the guidelines, a 10% total risk-based capital ratio is required, of which 6% must be Tier I capital.

Under the risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet items are assigned to one of several broad risk categories according to the obligor, or, if relevant, the guarantor or the nature of the collateral. The aggregate dollar amount in each risk category is then multiplied by the risk weight associated with the category. The resulting weighted values from each of the risk categories are added together, and generally this sum is the company’s total risk weighted assets. Risk-weighted assets for purposes of United’s capital ratios are calculated under these guidelines.

A minimum leverage ratio is required in addition to the risk-based capital standards and is defined as Tier I capital divided by average assets adjusted for goodwill and deposit-based intangibles. Although a minimum leverage ratio of 3% is required, the Federal Reserve Board requires a bank holding company to maintain a leverage ratio greater than 3% if it is experiencing or anticipating significant growth or is operating with less than well-diversified risks in the opinion of the Federal Reserve Board. The Federal Reserve Board uses the leverage and risk-based capital ratios to assess capital adequacy of banks and bank holding companies.

 

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The following table shows United’s capital ratios, as calculated under regulatory guidelines, at June 30, 2012, December 31, 2011 and June 30, 2011.

Table 15—Capital Ratios

(dollars in thousands)

 

     Regulatory     United Community Banks, Inc.
(Consolidated)
    United Community Bank  
     Guidelines      
           Well     June 30,     December 31,     June 30,     June 30,     December 31,     June 30,  
     Minimum     Capitalized     2012     2011     2011     2012     2011     2011  

Risk-based ratios:

                

Tier I capital

     4.0     6.0     14.19     13.69     13.62     14.30     13.60     13.33

Total capital

     8.0        10.0        15.93        15.41        16.16        15.56        14.87        15.12   

Leverage ratio

     3.0        5.0        9.09        8.83        8.52        9.16        8.78        8.35   

Tier I capital

       $ 634,811      $ 618,695      $ 626,485      $ 638,823      $ 614,532      $ 613,016   

Total capital

         712,422        696,881        742,930        695,369        671,718        695,358   

United’s Tier I capital excludes other comprehensive income, and consists of shareholders’ equity and qualifying capital securities, less goodwill and deposit-based intangibles. Tier II capital components include supplemental capital items such as a qualifying allowance for loan losses and qualifying subordinated debt. Tier I capital plus Tier II capital components is referred to as Total Risk-Based capital.

Effect of Inflation and Changing Prices

A bank’s asset and liability structure is substantially different from that of an industrial firm in that primarily all assets and liabilities of a bank are monetary in nature with relatively little investment in fixed assets or inventories. Inflation has an important effect on the growth of total assets and the resulting need to increase equity capital at higher than normal rates in order to maintain an appropriate equity to assets ratio.

United’s management believes the effect of inflation on financial results depends on United’s ability to react to changes in interest rates, and by such reaction, reduce the inflationary effect on performance. United has an asset/liability management program to manage interest rate sensitivity. In addition, periodic reviews of banking services and products are conducted to adjust pricing in view of current and expected costs.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

There have been no material changes in United’s quantitative and qualitative disclosures about market risk as of June 30, 2012 from that presented in the Annual Report on Form 10-K for the year ended December 31, 2011. The interest rate sensitivity position at June 30, 2012 is included in management’s discussion and analysis on page 48 of this report.

Item 4. Controls and Procedures

United’s management, including the Chief Executive Officer and Chief Financial Officer, supervised and participated in an evaluation of the Company’s disclosure controls and procedures as of June 30, 2012. Based on, and as of the date of that evaluation, United’s Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures were effective in accumulating and communicating information to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures of that information under the Securities and Exchange Commission’s rules and forms and that the disclosure controls and procedures are designed to ensure that the information required to be disclosed in reports that are filed or submitted by United under the Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

There were no significant changes in the internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

 

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Part II. Other Information

Item 1. Legal Proceedings

In the ordinary course of operations, United and the Bank are defendants in various legal proceedings. Additionally, in the ordinary course of business, United and the Bank are subject to regulatory examinations and investigations. Based on our current knowledge and advice of counsel, in the opinion of management there is no such pending or threatened legal matter in which an adverse decision could result in a material adverse change in the consolidated financial condition or results of operations of United.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in United’s Annual Report on Form 10-K for the year ended December 31, 2011.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – None

Item 3. Defaults upon Senior Securities – None

Item 4. Mine Safety Disclosures—None

Item 5. Other Information – None

 

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Item 6. Exhibits

 

Exhibit No.    Description
31.1    Certification by Jimmy C. Tallent, President and Chief Executive Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2    Certification by Rex S. Schuette, Executive Vice President and Chief Financial Officer of United Community Banks, Inc., as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32    Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunto duly authorized.

 

UNITED COMMUNITY BANKS, INC.

/s/ Jimmy C. Tallent 

Jimmy C. Tallent

President and Chief Executive Officer

(Principal Executive Officer)

/s/ Rex S. Schuette

Rex S. Schuette

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

/s/ Alan H. Kumler

Alan H. Kumler

Senior Vice President and Controller

(Principal Accounting Officer)

Date: August 7, 2012

 

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